After the Spring Festival, the listing date of domestic crude oil futures is drawing nearer. She Jianyue, chief economist of the Crude Oil Department of CNOOC Petrochemical Import & Export Co., LTD., told the Futures Daily in an interview recently that the listing of crude oil futures is timely and is the result of changes in the supply and demand pattern of the international crude oil market. As the Shanghai crude oil futures gradually develop and mature in the future, they may become a "barometer" of the supply and demand situation in the domestic crude oil market and even in the area east of Suez. While interacting with the existing international benchmark crude oil prices, they will also provide domestic oil-related enterprises with price risk management tools that better meet their business needs.
The international supply and demand pattern has changed, and the listing of crude oil futures is timely
In recent years, the Asia-Pacific region, represented by China, has witnessed rapid economic development, and its consumption of crude oil has been increasing day by day. Meanwhile, the crude oil futures denominated in their own currencies launched by some countries have not yet gained international influence due to their own flawed conditions. In this context, as the leading player in crude oil trade in the Asia-Pacific region, China's upcoming launch of the Shanghai crude oil futures denominated in RMB is expected to provide a more reasonable pricing benchmark and risk management tool for crude oil trade in the Asia-Pacific region.
According to the Futures Daily reporter's understanding, as the world's second-largest economy and the largest importer and consumer of global bulk commodities, China has long been facing the awkward situation of "everything bought is expensive and everything sold is cheap" in the international bulk commodity market. This is even more evident in the field of crude oil, the king of bulk commodities. In fact, the price at which Asian countries import crude oil from the Middle East has always been higher than that of European and American countries. This is what is called the "Asian premium" in the market.
In fact, the Asia-Pacific region does not have its own pricing benchmark for crude oil trade. The oil prices of the world's two major benchmark crude oils, Brent and WTI, reflect the global supply and demand situation. However, in terms of price structure, they cannot accurately reflect the supply and demand situation of the crude oil market in the Asia-Pacific region. Instead, they more reflect the supply and demand situation of the crude oil markets in Europe and the United States. Although countries such as Japan, India and Singapore have all launched crude oil futures contracts denominated in their local currencies since 2000, they have not yet made a significant impact and thus fail to reflect the supply and demand situation of crude oil trade in the Asia-Pacific region.
With the full recovery of the global economy, the Asia-Pacific economy, led by China, is gradually improving, and the consumption of basic energy - oil - is increasing day by day. The latest data shows that in 2017, China surpassed the United States to become the world's largest crude oil importer for the first time, with an average daily crude oil import volume of 8.43 million barrels, and it is leading the global crude oil trade to accelerate its eastward shift. The Asia-Pacific region urgently needs to develop crude oil pricing benchmarks and risk control management tools that better represent the supply and demand situation of crude oil in the region. The listing of Shanghai crude oil futures can be described as timely. She Jianyue said.
It is understood that as the world's second-largest consumer of crude oil, China's crude oil consumption is largely dependent on imports, with an external dependence rate exceeding 65%. Although China's economy has entered a new era and is shifting from a stage of high-speed growth to one of high-quality development, it still requires the "blood of industry" to support its growth. Therefore, Shanghai crude oil futures are bound to have huge potential and space for development in the future. She Jianyue said that as global crude oil trade is gradually shifting eastward and China has become the world's largest crude oil importer, with the development of Shanghai crude oil futures, the price of Shanghai crude oil futures is very likely to become the pricing benchmark for crude oil prices in the Asia-Pacific region and is expected to serve as a "barometer" reflecting the supply and demand relationship of crude oil in the Asia-Pacific region.
Establish a linkage relationship with the world crude oil price
She Jianyue believes that to become a "barometer" of crude oil supply and demand in the Asia-Pacific region, it is first necessary to form a linkage relationship with the world's two major crude oil pricing benchmarks, providing sufficient arbitrage opportunities for market participants. Then, through the market's own regulatory function, the pricing system of the crude oil market in the Asia-Pacific region can be improved, generating a series of prices that are more in line with the market fundamentals.
In fact, according to the Futures Daily reporter's understanding, when designing domestic crude oil, the Shanghai International Energy Exchange took this into account and thus set its delivery target as the authoritative and vacant variety in the current international crude oil futures market - medium-quality sulfur-containing crude oil (the delivery target of WTI and Brent crude oil is light low-sulfur crude oil). This not only establishes a natural connection with the world's major crude oil production area, the Middle East, but also finds a clever breakthrough point, leaving a huge development space for the future of Shanghai crude oil futures.
However, in She Jianyue's view, this alone is still not enough. To truly be interconnected with international crude oil prices and become a "barometer" reflecting the supply and demand situation of crude oil in the Asia-Pacific region, it is necessary to have sufficient liquidity and a large number of arbitrageurs to participate, thereby triggering the market's self-regulation function, improving the pricing system, and generating a series of crude oil prices that conform to the fundamentals of crude oil trade in the Asia-Pacific region.
Arbitrageurs have always been one of the main contributors to liquidity and price efficiency in the futures market. In fact, as long as there are price spreads (such as inter-period, inter-region, and split spreads), arbitrageurs have the opportunity to trade. For instance, the Shanghai crude oil futures are linked to the prices of crude oil in the Middle East such as Dubai. Its price is bound to have a certain relationship with the prices of crude oil in the Middle East. Arbitrageurs are bound to be able to seek cross-regional arbitrage opportunities between the spot crude oil in the Middle East and the main contract of the Shanghai crude oil futures. She Jianyue said that there are bound to be certain price differences between different contracts of Shanghai crude oil futures and between upstream and downstream crude oil and refined oil products. All these provide arbitrageurs with arbitrage opportunities across periods and splitting price differences, which is expected to encourage more people to participate. Arbitrage trading, on the one hand, contributes liquidity to the market and enhances the price discovery ability of Shanghai crude oil futures, thereby making the price and spread relationship more reflective of changes in the market fundamentals.
"Shanghai crude oil futures will also go through a development process and eventually become a 'barometer' of crude oil supply and demand in China and even the Asia-Pacific region." " Overall, She Jianyue believes that the future of Shanghai crude oil futures is promising. In his view, as arbitrage trading takes effect in the future, Shanghai crude oil futures will establish a certain degree of linkage with international crude oil prices, thereby providing domestic oil-related enterprises with more convenient and applicable crude oil price risk management tools, and also offering more operational opportunities to macro hedging institutions.
Furthermore, he believes that domestic oil-related enterprises will be significant contributors to the future liquidity and trading volume of Shanghai crude oil futures. However, before relevant enterprises prepare to use Shanghai crude oil futures for risk hedging, they need to do their homework carefully, understand the specific details of the relevant operations, and make contingency plans. For instance, due to the unique geographical, commercial and other environmental influences, the delivery warehouses of Shanghai crude oil futures are widely distributed, stretching along the long coastline from Dalian to Zhanjiang. Therefore, relevant enterprises need to have an understanding of the delivery warehouse that will accept their goods before delivery to avoid delays due to related issues, which may affect normal production and trade. Meanwhile, the internal radiation range of the relevant delivery warehouses is also a key point that related enterprises need to understand." She Jianyue suggested. According to the reporter's understanding, at present, there is no fully interconnected transportation network between the delivery warehouses and refineries of Shanghai crude oil futures. Therefore, after some refineries receive their own goods from the delivery warehouses, they still need to transport their production raw materials back to the refineries through other logistics methods. All these will affect the production costs of enterprises, and enterprises need to further understand and plan.