Can China Influence Global Oil Prices? The Debate Heats Up

Six months after China launched its own oil futures, the debate is heating up over whether the world’s biggest crude buyer can make its benchmark as influential as global rivals.

The long-awaited yuan-denominated contract debuted in March with a plan to increase China’s influence over pricing as well as promote the use of its currency in international commerce. While trades in the derivative are still less than a fraction of those in London’s Brent crude futures and West Texas Intermediate in New York, volumes in Shanghai have spiked after a slow start.

Yet concerns abound over the limited number of oil traders that are participating, as well as the country’s strict capital controls, according to industry experts at a gathering in Singapore. Meanwhile, price reporting agency Argus launched a price assessment this month for crudes delivered to Shandong province — the home of China’s independent refineries — in a sign competition to create Chinese oil benchmarks is intensifying.

Shanghai crude futures were up 1.1 percent at 563.6 yuan ($81.87) a barrel at the close. Brent, the benchmark for more than half the world’s oil, rose 0.2 percent to $81.89 a barrel at 9:50 a.m. in London, while WTI was little changed at $72.22 in New York.

The following are comments made during the Asia Pacific Petroleum Conference (APPEC) this week:

Asia’s refiners are buying an increasing number of long-haul barrels from the Atlantic Basin, and it would help spot trading if the benchmark had more crudes delivered into it, according to Mike Muller, director of global business development at Vitol Group. The Shanghai futures contract also needs to allow for cargoes to be traded, transferred or swapped while on the water, he says.“The onus is on the Asian refiners to call for it. The crudes in the INE basket would interrelate more if they could be freely traded or transferred in China or swapped on the water, and that’s the sort of thing that the market might start calling for.” Asian and European market players need more regional benchmarks and Shell is supportive of how the Shanghai crude futures contract is developing, according to Mark Quartermain, vice president of crude trading and supply at Royal Dutch Shell Plc.“I can see a huge clamor for that in northwest Europe, I can see a clamor for that in China. We are very supportive and very keen to be part of the debate.” Day traders are common and liquidity is limited for contracts further down the curve, according to Bill Bolton, BP Plc’s chief financial officer of integrated supply and trading for the Eastern Hemisphere.“We believe we’re seeing a lot of day traders in the Shanghai market. We need to give it some time to see how it plays out into the delivery windows, and how taking physical delivery is going to work. We’d like to see a little more depth to the market down the curve and that will offer much more opportunity.” China’s controls on its currency and foreign market participation aren’t creating a proper spot market for Asia, says Ed Morse, global head of commodities at Citigroup Inc. “You need a real spot market on a real crude to get a market to develop on it. I think two things are required: It can’t be a crude that exists on a piece of paper and China needs to allow for full currency convertibility not potential currency convertibility.” Shandong province’s biggest independent refiner thinks state giants such as Sinopec and China Oil & Gas Group Ltd. dominate trading. It’s also easier to compare different crude prices in U.S. dollars instead of the yuan, says Zhang Liucheng, general manager at Shandong Dongming Petrochemical & Energy Group.“Everyone’s watching but few people are actually trading it, and companies of our size can get squeezed by bigger players. There are also many day traders who are just speculating on the prompt market.”