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Product Spotlight: 1-month Anniversary: Shanghai Oil Futures Volume Outpacing DME

May 03, 2018

Shanghai INE Crude Oil

The Shanghai International Energy Exchange (INE) is in a winning race to secure its spot as Asia’s dominant oil futures contract. Despite launching during heightened oil market volatility, geopolitical risk, trade tariffs, and disagreements, the INE contract is witnessing continued growth in volume.

As we reported a couple of weeks ago, China introduced the world’s first oil futures contract settled in Yuan and trading volumes have been growing as Straits anticipated. We believe this will continue to be the case for the foreseeable future as China continues to internationalize markets and expand its financial sector.

Shanhai INE Crude Oil

Volume: INE vs. CME vs. DME

Overall, in just one month, the daily volume of INE Crude Oil futures has more than doubled from the first trading session’s (March 26th) 42,236 contracts to 109,934 on April 27th. While still modest compared to CME Group’s 2,056,787 contracts on April 11th, the INE is experiencing higher velocity in volume change compared to its counterparts. The DME’s crude oil futures highest daily volume for April was just 7,192 contracts traded on April 25th.

Over the past month, the INE contract’s average daily volume change was +19.19% compared to CME Group’s +1.92%, and DME Crude oil contract +11.44%. This has taken place during trade negotiations between the US and China, and additional geopolitical risk to oil markets from a trifecta of issues regarding Syria, Russia, and Iran. Still, volumes continue to rise, and it appears recent market events are bringing more liquidity in the CME and INE futures contracts, further strengthening INE’s high correlation with international markets and presenting new trading opportunities. 
Shanhai INE Crude Oil
Price Behavior

Regarding price action, we have been analyzing settlement prices to establish a pattern. The DME contract seems to be pricing in $2-3 of geopolitical risk premium while the Asia-based INE Crude Oil futures contract, when converted to USD, is mostly settling in between the CME and DME futures contract prices as shown in the graph below.
Shanghai INE Crude Oil
There have been days where the CME, DME, and INE seem to move in unison and other days where the arbitrage opportunities seem extreme. One thing we have noticed is high prices typically couple with large increases in volume. Moves lower in price seem to be consistent with lower volume. Given that the DME has extremely high price correlation with CME, and that INE specifications are very close to DME, prices should have a higher correlation, but this is not yet the case, which presents arbitrage opportunities.

Shanghai INE Crude Oil

Position Highlights

Reuters reports that hedge funds and other money managers cut their combined long positions in NYMEX and ICE WTI by 17 million barrels, Brent by 7 million barrels, and European gas oil by 2 million barrels for the week ending April 24. The report further states that money managers have not significantly increased their holdings since February and April, hinting that they were fully invested in crude before last week. On the other hand, fund managers have been adding net long positions in gasoline and heating oil, and for the week ending April 24, held a record long 111 million barrels in US gasoline.

The differences in price and growth in volume suggest there is substantial potential for arbitrage opportunities between the three contracts. Traders can be ahead of the curve by participating and understanding the advantages of accessing these Chinese futures through Straits Financial. Straits provides access to the INE Crude oil futures contract as well as the CME and DME contracts and other OTC listed energy products. With one account at Straits, traders can hedge and arbitrage crude oil markets, and many other markets, in all time zones across the US, Europe, and Asia.

Looking ahead, here are some of the key indicators traders will be watching this week:

May 2, 2018, 10:30am EST: EIA Petroleum Status Report
May 4, 2018, 1:00pm EST: Baker Hughes Rig Count

We continue to take note of different price behavior in the three contracts as the INE contract matures, and post updates on our newsletter and social media feed as a service for our clients. Please follow us on Twitter @StraitsFinancia and connect with us on LinkedIn here. To request additional information about accessing Crude Oil Futures Markets, please contact us in the U.S. at +1 312-462-4499 or in Singapore at +65 6672-9669 or you may email us at info@straitsfinancial.com.