China concluded the first physical settlement of the Shanghai crude futures contract (SC crude contract) on September 7, 2018, indicating that the newly launched contract has undergone all the trading processes, the Shanghai Futures Exchange said on its official website on September 10.

A total of 601,000 barrels was delivered via the first front-month crude contract on the Shanghai International Energy Exchange (INE), a branch of the Shanghai Futures Exchange, at a settlement price of CNY488.2/bbl ($71.57/bbl). The total value reached CNY293 million on a unilateral basis.

SC crude futures will better serve the physical market

The successful delivery indicates that the Chinese crude futures have passed the market test and are well accepted among industrial participants. It provides a reliable reference for the forthcoming contracts to keep liquid and develop, and will attract more industrial participants, ranging from oil companies and refiners to traders, to use the financial tool to lock in prices for their future physical cargoes.

The delivery process, as an important link between futures and spot cargoes, helps realize the convergence of futures prices and spot prices. The smooth process had set a good example to the subsequent contract trading, participants in the delivery commented.

Some state-run oil companies were heard to have signed long-term crude contracts with overseas suppliers, priced against SC crude futures and in renminbi. The SC crude futures have already begun to reflect physical supply and demand fundamentals and are expected to better serve the real economy.

SC crude futures are gaining momentum

The SC crude futures have already showed strong development momentum though it is only five months since the launch.

As of August 31, INE crude contracts had recorded a total trading volume of 11.09 million lots, valued at CNY 5.39 trillion, and an average daily position of 14,800 lots, replacing DME Oman crude futures as the world’s third largest crude futures contract. Related: Tariff Threats Aren’t Impacting China’s LNG Demand

While keeping a good correlation with international crude futures, China’s crude futures can independently mirror supply and demand in the Asia-Pacific market. There was once a whopping spread of $5/bbl between SC crude futures and DME Oman crude futures, opening a modest arbitrage window. Some participants took the chance to apply for approval for cargo delivery into INE-designated storage tanks from the exchange and got ready to deliver physical cargoes via the SC crude contract, which market sources see as the most direct and effective response to SC crude futures.

SC crude futures are attracting more participation

Over 30,000 participants have so far opened an account on the INE platform for crude futures trading. Over ten large domestic and overseas oil companies and traders started their trading on the launch day alone.

Financial institutions including securities, fund management companies and trust companies take up 15% of all the participants, indicating robust demand from the enterprise asset management sector.

Overseas participants are watching closely on the Chinese crude futures, and multiple oil companies, traders, financial institutions alike from Singapore, the UK, the US, etc. have already participated in trading the contract. Currently, about 15 percent of the positions are held by overseas participants, versus 5 percent over the first two trading months.

Moreover, international institutions such as the International Energy Agency and the Organization of Petroleum Exporting Countries have also contributed objective analysis of China’s crude futures.

While the SC futures contract is making a name for itself in oil markets, there is still a long way to go for Shanghai crude futures to compete with the world’s top two benchmarks, NYMEX WTI and ICE Brent.

By JLC

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