China’s oil futures surge on their debut

Beijing hopes the new market will eventually give the country an oil benchmark to rival those in the U.S. and Europe

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By

STELLAYIFAN XIE

China’s yuan-denominated crude-oil futures surged on their long-awaited debut Monday, indicating positive initial sentiment toward the new market, which Beijing hopes will eventually give the country an oil benchmark to rival those in the U.S. and Europe.

The most actively traded futures contract due for delivery in September closed up 3.3% at 429.9 yuan ($68.07) per barrel on the Shanghai International Energy Exchange, after opening up more than 6% from a starting reference point of 416 yuan per barrel. Over 42,000 lots, or more than 21 million barrels, of oil valued at 18.3 billion yuan ($2.9 billion) were traded on Monday, according to data from Wind Information Co.

Beijing has been planning to launch its own oil market for several years, with the aim of providing an oil price that will be more closely aligned to local supply and demand conditions. China is the world’s biggest importer of oil after the U.S., and its fourth-largest producer. The new oil futures traded in Shanghai are open to foreign investors, the first time China has allowed them to trade in its domestic commodities markets in this way.

See: China faces hurdles as it vies with U.S. in oil-futures market

On Monday, Brent crude-oil futures LCOK8, -0.57% — the global benchmark based in London — were trading at $70.46 per barrel, while West Texas Intermediate futures CLK8, -0.59%  , the U.S. version, were trading at $65.68 per barrel.

Despite buoyant initial demand for the Shanghai oil contract, some analysts say the number of restrictions on trading and fears of regulatory intervention in the market could over time limit domestic interest in the market.

Meanwhile, Chinese commodities markets’ reputation for high volatility, and the fact that the contracts are denominated in yuan, not dollars, could damp international investors’ appetite for the futures.

“Trading has been relatively active and smooth so far,” said Gui Chenxi, an analyst at brokerage Citic Futures Co. “It’s a positive step forward, though investors will tread with caution at first as regulators see overall market stability as a desirable goal.”

Gui said it would likely take time for overseas investors to become familiar with the new oil futures, which have been designed in line with existing Chinese contracts. More than 150 Chinese institutions and 19 foreign firms have so far received approval to offer brokerage services to crude-oil futures traders, according to the Shanghai International Energy Exchange.

One issue for overseas investors is how easy it will be for them to take money out of China, given the country’s still relatively strict capital controls.

“As the most influential among all commodities, the crude futures could attract lots of interest from global investors. The question is how can overseas capital flow into China given Beijing hasn’t allowed for full convertibility of its currency,” said Fan Qingtian, a trader at Wuhan-based Changjiang Futures Co.