* Chinese crude futures could be launched as early as
* Exchange seeks foreign players for yuan-denominated
* Oil market reforms will squeeze China's state oil giants
By Jacob Gronholt-Pedersen
SINGAPORE, Sept 2 China may launch a global
crude oil futures contract as early as October to compete with
the existing London Brent and the U.S. WTI benchmarks, three
sources said, as it pushes ahead with reforms to open up its oil
The long-awaited crude contract would better reflect China's
growing importance in setting crude prices, as well as boost the
use of the yuan in which it will be traded, although volatile
global trading conditions and China's recent interference in
stock markets have raised some concerns.
The Shanghai International Energy Exchange, also known as
INE, circulated a draft of the futures contract to market
participants last month, saying the launch could happen as early
as October, the sources who saw the draft, told Reuters.
China, the world's second-biggest oil consumer, has already
begun to loosen its grip on the physical oil sector this year by
granting quotas for imported crude to privately-owned refiners
for the first time, surprising market participants with the
speed of reform.
"The development of a futures market is closely linked to
the physical market," INE said in a statement issued to Reuters
in response to questions about the new contract.
"The more physical players participate, the better the
liquidity of the futures market will be."
The launch of Shanghai crude futures won state approval last
year and would be the first Chinese contract that allows direct
participation by international investors.
A Shanghai-based contract will compete in the crude futures
market, which is worth of trillions of dollars and is dominated
by two contracts, London's Brent, seen as the global
benchmark, and WTI, the key U.S. price.
Oil traders said Chinese crude futures would eventually
compete against Brent, which is priced off small and declining
oil fields in the British North Sea, and can be affected by
factors with no relationship to Asia.
INE said that it aimed to have overseas investors, oil
companies, and financial institutions participating in its crude
"If China's crude futures don't immediately attract enough
liquidity and markets are still as volatile as now, then traders
could get really burned and would quickly stop trading Chinese
crude futures," said one oil trader, who would likely start
dealing Chinese crude futures.
Recent market interference was also a concern, although he
noted China's iron ore and coal futures markets were running
smoothly despite similar price routs to oil.
For futures to work, traders need a widely traded physical
market from which prices for futures contracts can be derived.
Granting independent refiners access to oil imports will put
pressure on China's three state-owned oil majors, PetroChina,
Sinopec and China National Offshore Oil Corp (CNOOC), which
already face headwinds from collapsing oil prices, a stock
market rout and corruption charges.
"These changes are coming much faster than we anticipated,"
said an official with one of the big three state-owned energy
companies. "Reforming and opening up the oil market is the new
fashion in Beijing."
The government has so far granted a total of seven
independent refiners quotas for 715,800 bpd of imported crude,
roughly 11 percent of the total crude imports, and more are
likely to follow.
"The liberalization of the Chinese oil market will provide
more favourable market conditions for the launch of crude oil
futures," INE said.
Given the reforms and increased competition, HSBC advised
its clients to be "cautious towards the share price potential of
China's oil majors."
Citi Group expects crude demand from the seven independent
refineries to more than double to 815,000 barrels per day (bpd)
by the end of 2015.
At least eight more refiners have already applied for
quotas, and another 15 are expected to apply, the bank said.
The reforms would advance competition by putting pressure on
China's national oil firms, said Philip Andrew-Speed, head of
energy security research at National University of Singapore.
"The private sector has grown in China not so much by
privatisation, but by squeezing the state sectors so they become
either better performing or irrelevant," he said.
(Editing by Henning Gloystein and Richard Pullin)