The Shanghai Futures Exchange is finalizing details of its first crude oil futures contract, with the contract expected to be launched by the end of the year, a source close to the exchange told Platts Monday.
“The contract is not expected to be launched until end-2013 as the government has yet approved it,” the source said.
The new launch date is a delay from previous indications of late 2012 and Q1 this year as many details of the contract have not been finalized.
“Some detailed rules, such as registration requirements for foreign participants, are not finalized yet. The exchange also has to decide whether to trade the contract in Yuan or US dollars, although it can be settled in either currency,” the source added.
The SHFE is also currently in talks with several bonded oil storage terminals in northeast China’s Dalian, east China’s Ningbo and Zhoushan on the possibility of setting up delivery depots for the crude contract, another source said.
The contract, which will reflect “a tax-free price” of crude, is designed for physical delivery at bonded storage.
Meanwhile, the test run of its trading platform for the contract, which started in early November 2012, has involved more participants including individual investors and foreign companies and is expected to complete in May, sources said.
CONSTANT REVISION OF CONTRACT
The long-expected crude contract was initially mooted by the SHFE in early 2010, when it considered a light sweet crude as its benchmark. China’s flagship Daqing crude, a light crude with gravity of 32.7 API and 0.1% sulfur content, had been considered as a deliverable grade.
However, when the exchange announced its plan of the contract’s launch last May, a copy of the draft contract showed that it had adopted medium sour crudes, with gravity of 32 API and 1.5% sulfur content, as the tradable grade.
Medium sour crudes would be widely accepted by China’s futures players as the barrels have the highest liquidity in the China market, said a futures trader from Guangzhou.
The deliverable grades are Middle Eastern crude grades Dubai, Oman, Qatar Marine, Iraq’s Basrah Light and Abu Dhabi’s Upper Zakum, as well as Russia’s Urals, Yemen’s Masila and Shengli, another domestic Chinese crude. The exchange will set price differentials for the various crude grades to its settlement prices for physical delivery.
The eight deliverable crude grades were recently classified by the SHFE into three tiers, sources said.
Oman, Upper Zakum and Dubai have been grouped together and will be delivered at parity to the contract’s monthly settlement price. Masila and Qatar Marine will be in the second group and could likely be priced at a premium, of 50 cents/b for example, said one source. The third tier comprising the remaining crudes will be priced at a discount to the settlement prices, the source added.
The SHFE will determine the price differentials by using the crude prices provided by independent, third party information providers such as Platts, and update them when necessary. Based on existing logistics,the minimum physical delivery size has been set at 200,000 barrels or 2,000 lots of 100 barrels each, sources said.
DOMESTIC TRADERS EXPECT HIGH LIQUIDITY
Most trading sources expressed optimism about the liquidity of the crude contract, although the SHFE’s fuel oil contract — the first energy futures on the exchange — has seen thin trade since last July.
This is because oil and petrochemical traders see the crude contract as a useful hedging tool given China’s growing appetite for imported crude oil and its expanding energy demand.
“We haven’t heard that the exchange will [specifically court] large players to support trading activities for the crude oil contract,” said a source from a trading member of SHFE.
“The crude contract will attract more players than the fuel oil one as the former allows both domestic and international players to trade,” said a Beijing-based trader.
Moreover, “crude oil is the feedstock for a wide range of products, thus all producers would be able to use the contract as a hedging tool,” said a Guangzhou-based futures trader.
Trading interest is expected to remain sustained even though a majority of the players will not be allowed by the government to move barrels from bonded delivery depots into the domestic market. In China, only companies with government crude import licenses are permitted to do so. These companies are PetroChina, Sinopec, CNOOC, Zhenhua, Sinochem and Zhenrong.
“For players without government crude import licenses, they will still have several options on the platform… to close their positions directly. If they choose physical delivery, they can keep the barrels in bonded storage then resell them to those companies with licenses or to other countries like Japan and South Korea,” added the Guangzhou-based trader.
China’s total crude imports in 2012 rose 6.8% year on year to 271.02 million mt or 5.43 million b/d, data from China’s General Administration of Customs showed.