China launches crude oil futures trading

SHANGHAI, March 26 (Xinhua) — China on Monday launched trading of the yuan-denominated crude oil futures contracts at the, which is the first futures listed on China’s mainland to overseas investors.

The listed futures for trading are contracts to be delivered from September this year to March 2019. The benchmark prices of 15 contracts were set at 416 yuan (65.8 U.S. dollars), 388 yuan and 375 yuan per barrel, varied by delivery dates.

Li Qiang, Shanghai’s Party chief, and Liu Shiyu, chairman of China Securities Regulatory Commission, together rang the gong to open the trading session.

The opening price of the SC1809 contract started at 440 yuan per barrel.

Twenty minutes after the opening, 14,000 transactions were changed hands.

Trading margins for the futures are set at 7 percent of the contract value. The upward and downward trading limits are at 5 percent, with the trading limits on the first trading day set at 10 percent of the benchmark prices.

The front-month contract closed the afternoon session at Yuan 429.9/b ($68.03/b) and it was $4.06/b higher than NYMEX September crude futures contract which was trading at $63.97/b, but 26 cents/b lower than the same-month ICE Brent futures contract which was quoted at $68.29/b as of 3 pm Singapore time (0700 GMT).

The spread between front-month September delivery futures contract and the second-month October contract stood at a premium of Yuan 3.5/b, maintaining the backwardated market structure since the debut opening at 9 am.

A backwardation in the crude market structure represents higher prices for the nearby delivery month than the forward month contracts. In essence, backwardation typically signals strong demand and the structure occurs when market participants are expecting prompt prices to outpace future prices.

At the close of the afternoon session, a total of five different monthly futures contracts for delivery in September, October, November, December 2018 and January 2019 have changed hands on the futures exchange, while five quarterly futures contracts for delivery in the quarters ending March, June, September, December 2019 and June 2020 have also traded.

The trading hours of the contracts are divided into two morning sessions, one afternoon session and one night session in a day.

Around 42,336 lots of crude futures contracts have changed hands so far, of which around 40,656 lots were September contracts as of the end of the afternoon session at 3 pm, accounting for 96% of the total traded volumes, data from INE’s website showed.

The front-month September delivery contract, which started trading Monday, will expire on August 31, allowing plenty of time — more than five months — for market participants to take a position and the new derivatives market to build sufficient liquidity.

Trading of a contract will cease on the last trading day of the month prior to the delivery month, the exchange said previously.

Following the August expiry date and during the calendar month of September, the newly rolled front-month Shanghai futures contract would reflect physical delivery of crude oil in October.

Overseas investors can invest in the future contracts through various measures. At the beginning, U. S. dollars can be used as deposit and for settlement. In the future, more currencies will be used as deposit.

“China is the world’s largest importer of crude oil and the introduction of RMB-denominated crude oil futures contract represents a milestone for China’s Futures Market,” said David Martin, Asia Pacific Head of Global Clearing at J.P. Morgan.

Meanwhile, Wood Mackenzie said in a note that the impact of Shanghai crude futures on global crude prices will be marginal if there is not enough liquidity.

“Absence of a paper market could limit liquidity, as these contracts are expected to be physically settled. Further, the contracts are limited to seven grades that account for only 15% to 20% of China’s crude imports. The presence or absence of major buyers or sellers can cause large speculative price swings in the exchange benchmarks,” it said, adding that the sellers would also have to bear the risk arising from any adverse movements in Chinese exchange rates.

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