The Daily Update - Renminbi Oil Futures

Yesterday the first ever Yuan denominated oil futures began trading in China on the Shanghai International Energy Exchange. The launch of the oil futures is the first time foreign investors can trade commodity derivatives in China due to being registered in Shanghai’s free trade zone, and has attracted some of the world’s biggest commodity traders. However, it’s not the first time China has tried to introduce an oil futures market. The previous attempt in 1993 failed after just a year when the unmanageable levels of volatility made hedging impossible.

Last year China overtook the US as the biggest importer of oil, importing 8.4m barrels of oil a day, practically double the imports recorded in November 2013, 500,000 barrels more a day than the US. China has long wanted to wrestle some control away from the USD based benchmarks, Brent and West Texas Intermediate, and with the Chinese authorities’ ambition to continue the internationalisation of the renminbi, launching the oil futures exchange may help achieve those goals.

China has for some time pushed for key oil exporters to agree payments in yuan, as Russia (China’s biggest supplier) and Iran already do, however so far Saudi Arabia has resisted calls to move away from the petrodollar. However, the pressure that China puts on the Kingdom may be about to be ratcheted up. Firstly, late last month Aramco, Saudi’s state-run oil supplier, signed a deal to supply 12 million barrels of oil to China in 2018, up from the 6 to 8 million barrels supplied last year. Also there have been reports that China is offering to purchase up to 5% of Saudi Aramco’s initial public offering to become a cornerstone investor. Were this to happen, it would give the Chinese some leverage when negotiating terms with Saudi Arabia in future, although they are not alone in wanting to be involved in the IPO at ground level. The reports also suggest that sovereign wealth funds from Russia, Japan and South Korea are also keen in acquiring a stake.

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