Shanghai crude oil futures roar into action

Randall Padilla
March 28, 2018

"President Donald Trump continues to suggest the United States will pull out from (the) Iran nuclear deal, which raises the spectre of bringing back sanctions on the country and severely limiting Tehran's ability to export crude oil", said Stephen Innes, head of trading for Asia/Pacific at futures brokerage OANDA in Singapore.

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.

As it stands, oil exporters store the revenue from their USA oil sales in Treasury bonds - a process known as "petro-dollar recycling". The global benchmark traded at a $4.56 premium to WTI.

The number of active U.S. oil rigs rose to a three-year high of 804 last week, implying further rises in future production. Contracts set up by the Dubai Mercantile Exchange a decade ago have not matched Brent or WTI, traded on the Intercontinental Exchange and the New York Mercantile Exchange (NYMEX) owned by CME Group.

In the longer term, the futures exchange will enable China's crude-buying patterns to become more transparent to the world.

"The recent rally in oil prices might have taken some by surprise as the underlying fundamental picture does not justify Brent being close to US$70 a barrel". At 9 a.m. local time on Monday, crude contracts began trading on the Shanghai International Energy Exchange .

"We prefer to watch for a while", said one Weifang-based independent refiner.

Straits said it brokered the first trade for Glencore and cleared the deal through Xinhu Futures. While the commodity has been weighed down by U.S. supply concerns in the past, crude oil has moved up sharply in the past few weeks. Still, concerns over American shale oil remain, with analysts forecasting a gain in US crude inventories last week.

The admission of foreign investors directly to futures trading occurs for the first time in Chinese commodity markets.

"In the short-term, we believe price fluctuations will reflect domestic crude oil supply and demand".

Lower crude prices have played a part as to why not earlier.

The most-active September contract opened at 440.4 yuan per barrel from a reference point of 416 yuan, and jumped to as high as 447.1 yuan in the first few minutes.

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.

The price of Brent hit $71 per barrel in the middle of January, despite surging production by the United States, which is offset by the production cuts led by the Organisation of Petroleum Exporting Countries (OPEC) and Russian Federation.

At the end of the morning session, Shanghai prices were up 3.92 per cent at 432.4 yuan, with 30,742 lots traded.

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