China, US trade dispute weighs on prices

Robyn Valdez
March 28, 2018

China's launch of yuan-backed oil futures has sparked huge interest among investors with initial trade volumes of the contracts outpacing overnight transactions of rival Brent crude - a globally recognized benchmark.

Shanghai crude oil futures opened up more than six per cent on Monday with nearly 20 million barrels of the most-active September contract changing hands.

While it remains to be seen whether they're in it for the long haul, the participation of Glencore, Trafigura and other foreign investors in the contract's debut is a boon.

"We prefer to watch for a while", said one Weifang-based independent refiner. It was the first futures contracts listed on China's mainland to overseas investors, putting domestic and foreign investors on an equal footing. WTI's delivery point in Cushing, Oklahoma is hundreds of miles from the ocean, and the U.S. in any case banned crude oil exports for 40 years until 2015. September Brent and WTI traded near $68.22 a barrel and $63.94, respectively, on Monday.

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The early involvement of big global traders was a morale boost to the fledging market, but state oil majors like PetroChina and Sinopec are expected to provide a significant amount of liquidity in the long-term.

On the other hand, global stocks, which have proven to be a significant influence on crude prices, came off six-week lows due to expectations that the USA and China will soon begin trade talks rather than undertake an all-out trade war.

China hopes it can do better: with state-controlled oil majors like PetroChina and Sinopec expected to provide liquidity, analysts said the contract has a chance of succeeding even if it faces short-term caution.

The price of SC1809 contracts started at 440 yuan per barrel and closed at 429.9 yuan per barrel, which is 3.34 percent higher than the benchmark price.

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Brent for May settlement rose to $70.97 a barrel on the London-based ICE Futures Europe exchange.

But analysts said Chinese capital controls will likely discourage hefty foreign engagement, as will wariness of the often wild gyrations in China's still relatively immature financial markets. By 11:14 a.m. (0314 GMT), 3,599 lots of the most-active June contract had traded, equivalent to 3.6 million barrels of crude.

According to Wei, this activity is especially important amid the US-Chinese row over the Trump administration's new high tariffs on Chinese imports, which is largely seen as nothing short of a trade war between Beijing and Washington.

The current positioning across the complex is a classic example of a market that has become "locked" with all traders trying to position themselves the same way.

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In Asia, crude oil is mainly priced against the Dubai, Oman and dated Brent benchmarks or Oman crude futures on the Dubai Mercantile Exchange.

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