Chinese Oil Futures Draw More International Interest - The Wall Street Journal

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Oil and gas tanks at a facility in Zhuhai, China, in 2018.
Photo: aly song/Reuters

July 1, 2020 6:04 am ET

Foreign companies and investors are warming to Chinese oil futures, a boost to a project that Beijing hopes will boost the yuan’s appeal and loosen the dollar’s hold on global commodity pricing.

China, the world’s largest importer of crude oil, launched yuan-denominated futures in March 2018. Trading was initially dominated by domestic players, but international involvement has been growing.

Market participants say higher trading volumes in the last couple of years—and the relative stability of Chinese oil prices this year—have helped increase global appetite.

Benjamin Yeo, head of dealing at Phillip Futures in Singapore, said since late last year more international investors had begun trading Shanghai crude-oil futures. His clients include physical traders, who buy and sell actual oil, and speculative proprietary traders. However, he said onboarding new traders requires more paperwork and client education than trading London or New York oil contracts.

This year, foreign players have made up 16% of average daily trading volume and 28% of daily open interest, the Shanghai International Energy Exchange said recently, quoting Wang Fenghai, general manager of its parent company, the Shanghai Futures Exchange.

That builds on a surge last year, in which foreigners’ average daily trading volume and daily open interest more than doubled, according to an earlier report from the exchange. Those participants included oil producers, trading companies and manufacturers from 19 countries and regions.

There are now more than 60 overseas brokers through which foreign investors can trade, up from 45 in 2018. These include units of JPMorgan, Goldman Sachs, Japan’s Mizuho Securities, and France’s BNP Paribas and Société Générale, plus numerous Hong Kong and Singaporean institutions.

John Murphy, executive managing director and head of the futures division at Mizuho Securities, said his company would be ready to handle Shanghai crude in a couple of months, adding that both hedge funds and large institutional investors had inquired about trading these futures.

Jin Xiao, head of commodities research at the Derivatives Research Institute of Orient Futures in Shanghai, said turmoil in global energy markets had helped fueled activity in Chinese crude this year.

Price controls in China have kept a lid on volatility, even as U.S. oil prices briefly dipped below zero in April. China’s economic planning agency sets prices for fuels like diesel and gasoline with reference to international energy trading, but stops adjusting prices if oil falls below $40 a barrel or tops $130.

Mr. Jin said traders and oil companies were able to benefit from this difference, buying Middle Eastern crude and delivering it to the Chinese market.

Some observers think Shanghai crude still has a long way to go. Fraser Howie, an independent analyst and author, said open interest, or the number of contracts outstanding, showed it was hardly challenging the big benchmarks.

Open interest in Shanghai crude-oil futures stood at about 146,000 contracts on June 29, versus millions of contracts for WTI and Brent.

Mr. Howie said limited demand for the Chinese currency, which is also known as the renminbi, also made it hard to establish a new global oil benchmark.

“Most people don’t hold, and don’t want to hold, renminbi,” he said.