SINGAPORE/BEIJING (Reuters) - China’s plans to create a new crude futures contract to compete with global pricing benchmarks have been shelved due to market resistance, five sources with knowledge of the matter said, dealing a blow to Shanghai’s ambitions to be a leading energy trading hub.
Potential international participants were worried they would not be able to freely exchange the yuan currency given a Chinese clampdown on capital outflows, and concerned at Beijing’s heavy handed intervention in its volatile commodity markets last year, the sources said.
Most of the trillions of dollars of oil traded each year is priced off two crude derivatives, U.S. West Texas Intermediate (WTI) and London’s Brent, and executed mainly on the New York Mercantile Exchange (NYMEX) owned by CME Group and Intercontinental Exchange.
With Asia becoming the world’s biggest oil consuming region, China had hoped to establish its own derivative crude contract on the Shanghai International Energy Exchange, known as INE, that would better reflect market conditions in the region.
But, after struggling to address the concerns of international players, INE has quietly dropped the plan for now, the sources told Reuters.
“This contract as originally proposed is not moving forward,” said a trading manager with an oil trading firm which was initially planning to take part in the launch, speaking on condition of anonymity.
An INE spokesman declined to comment. The China Securities Regulatory Commission, the country’s market regulator, did not respond to a request for comment.
The launch of a Chinese crude futures contract, originally expected around five years ago, has been repeatedly delayed, the last time to 2015/2016, as turmoil in China’s stock markets and other commodity futures raised concerns over the country’s capacity to handle financial turbulence.
“Shanghai futures were probably too ambitious,” said Oystein Berentsen, managing director for crude at oil trading firm Strong Petroleum in Singapore, which specializes in bringing oil into China.
INE’s failure to launch the crude futures is also a setback for China’s ambitions to be a major center for other exchange-based commodity trading. Crude futures had been seen as a testing ground for expanding derivatives contracts, including copper, rubber, steel and eggs, that would eventually be open to foreign investors.
Traders said various concerns contributed to the crude contract’s failure. “The questions that were largely left unanswered were over how reliable a central government that directly or indirectly controls everything from import and export licenses to pipelines or storage facilities would be as a price benchmark,” said industry veteran John Driscoll, director of consultancy JTD Energy in Singapore.
Lin Boqiang, energy expert of Xiamen University, said the main problem was that China’s crude futures would lack the depth of Western exchanges, with much of the trading conducted by state-run Petrochina and Sinopec.
He cited a “concern over lack of liquidity as the industry remains very much dominated by state giants”.
Another problem was the physical oil underlying Shanghai’s crude futures.
Unlike WTI or Brent, which are priced off a small amount of similar crude grades from the same area, Shanghai’s futures were to be priced from a cocktail of crudes from the Middle East and China.
Since these crudes vary in quality and price, there was disagreement over how to weight the different grades within Shanghai crude futures benchmark, traders said.
In addition, the manager with an oil trading company said that “every international entity involved from day one voiced its concern over the enormous risk of dealing crude in the yuan, a currency whose exchange rate is controlled by the government”.
Finally, some traders said the extreme price swings in other Chinese commodity futures, including steel rebar and iron ore, and regulatory interventions including restrictions on buying and selling, also scared off foreign players.
It is not clear exactly when the Shanghai crude futures plan was shelved.
Traders said they were still in contact with INE for most of 2016 about a potential launch, but that INE had gone silent towards the end of last year.
A manager with an international bank that initially considered registering said he had not heard anything from INE in months, adding that the matter was now considered “off the table” for several years.
Chu Juehai, INE’s former chief and the architect of the contract, quit in 2016, according to sources close to Chu. Reuters could not independently confirm his departure and INE did not comment.
In the absence of a dominant exchange, the current crude benchmark in Asia is price assessment run by S&P Global Platts, where trading in a specified time-frame is used to assess a daily price, off which dozens of refined oil products are priced.
“Platts is likely to dominate pricing in the short to medium term,” said Strong Petroleum’s Berentsen.
For a graphic on Asia oil demand click here.jpg
Reporting by Henning Gloystein in SINGAPORE and Aizhu Chen in BEIJING; Additional reporting by Mark Tay and Florence Tan in SINGAPORE; Editing by Alex Richardson