Shanghai takes its first step on long road to becoming oil price benchmark
Futures Exchange faces tough competition from Singapore and must win trust of foreign traders
Shanghai's ambitions to become a premier price benchmark for oil traded in Asia will take years to accomplish given the dominance of Singapore in the industry, but a crude futures contract traded in the city cannot be ignored given that China will become the world's top net importer of oil in 2014, analysts said.
Jiang Yang, vice-chairman of the China Securities Regulatory Commission, told a forum last month the Shanghai Futures Exchange would start trading the energy contract this year. Following nearly four years of drawn-out preparations, Beijing is determined to take a substantial step to gain pricing power in the global oil market.
"It is a lot of work. The Shanghai futures exchange has to convince foreign traders that the oil trading platform is a fair and transparent market with a complete set of rules," said Citic Futures analyst Liu Yang.
An oil pricing benchmark will not be created in Shanghai unless the city can attract explorers, refiners, users and traders outside the mainland to take part in trading.
"Singapore is an established market," commodity trader Danny Deng said. "But I believe all foreign traders wouldn't ignore the Shanghai contract owing to the mainland's role as a major oil consumer."
China is the world's second-largest oil consumer, trailing only the United States. But the US Energy Information Administration (EIA) predicts the world's most populated country will surpass the US as the largest net oil importer by the end of 2014.
Last year, China's oil imports increased 4 per cent to 280 million tonnes.
The EIA estimated that China would import 6.6 million barrels of crude oil per day in 2014, compared with 5.5 million barrels for the US.
Despite the country's increasing role in the global oil market, Li Runsheng, a vice-chairman of the China Petroleum and Chemical Industry Federation, admitted that a regional oil price benchmark could not be created in Shanghai overnight because it would still be some time before foreign traders fully understand the trading system.
Raheem Brennerman, chairman of international oil and gas exploration and production company Blacksands Pacific, told the South China Morning Post that the company would not participate in the trading of Shanghai oil futures initially, adding that its long-term outlook appeared to be bullish.
"With more regulatory oversight, Shanghai oil futures will be a dominant index for global crude oil traders," he said.
The mainland's crude oil futures would be denominated in both yuan and US dollars. China's existing regulations on foreign exchange are believed to be one of the barriers for the oil futures contract.
Initially, foreign traders are expected to receive a combined daily trading quota of US$5 billion a day since the Chinese yuan has yet to be fully convertible.
Sources said that the CSRC and the Shanghai exchange invited foreign brokerages to help design the trading framework for the energy contract to ensure a successful launch.
World crude oil prices are set by the New York Mercantile Exchange and in London, normally through the benchmark WTI price, and in comparison with the Brent price.
Other important prices for oil are Dubai crude, Oman crude and the Organisation of Petroleum Exporting Countries reference basket.
Deng said the development of China's crude oil futures is attractive for punters like him. He used to trade Brent oil contracts through an overseas account.
"I don't have to trade at night in Shanghai," Deng said. "It creates the best opportunity for seasoned investors like me."