Shanghai Oil futures are weighing on Western Benchmark volumes

SINGAPORE (Reuters) – The launch of China’s first crude futures contract in Shanghai has added a long-awaited Asian benchmark to the global oil sector, challenging the dominance of Western price-markers and threatening ramifications far beyond the energy industry.

Since their launch in March 2018, Shanghai crude futures have stolen market share from the incumbent benchmarks – Europe’s Brent and U.S. West Texas Intermediate (WTI) – which trade oil derivatives worth trillions of dollars every year.

Volumes have also far bypassed other crude futures, such as those that the Dubai Mercantile Exchange (DME) launched in 2007 with the goal of creating a Middle East/Asian price benchmark.

This shift in oil markets could have far-reaching implications, including in foreign exchange markets.

“It’s significant. Given the prominence of China in oil markets, we could see more use of the Shanghai contract,” said Stephen Innes, head of Asia-Pacific trading at futures brokerage OANDA in Singapore.

He said foreign exchange markets were also “taking notice of any yuanification.”

China is already shifting some of its crude futures trading activity away from the dollar and into its own yuan.

“I’m convinced China’s strategy on the trade war is it will continue to purchase crude from Iran in yuan, hedging (in) Shanghai,” Innes said, eliminating the currency risk of buying oil in the U.S. dollar.

China’s new benchmark could change this, potentially breaking the Brent-WTI financial duopoly that has dominated oil trading for decades, requiring international traders to get used to dealing some crude futures in yuan.

“The internationalization of the yuan will continue to pick up the pace as mainland markets become more accessible and transparent, and the Shanghai oil contract is an excellent start to that process,” said OANDA’s Innes.

Reuters

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Stephen Innes

Stephen Innes

Head of Trading APAC at OANDA
Stephen has over 25 years of experience in the financial markets and currently based in Singapore as the Head of Trading Asia Pacific with OANDA. Stephen's market views focus on the movement of G-10 and ASEAN Currencies. His views appear in Bloomberg, CNBC.Reuters, New York Times WSJ and the Economist. His media appearances include Bloomberg TV & Radio, BBC International, Sky TV, Channel News Asia, ASTRO AWANI and BFM Malaysia. Stephen has an extensive trading experience in Spot and Forward FX, Currency and Interest Rate Futures, Money Market Derivatives and Precious Metals. Before joining OANDA, he worked with organisations like Nat West, Chemical Bank, Garvin Guy Butler, and Sumitomo Mitsui Banking Corporation. Stephen was born in Glasgow, Scotland, and holds a Degree in Economics from the University of Western Ontario.
Stephen Innes