Shanghai crude oil futures jump more than 6%

Dianna Christensen
March 28, 2018

Oil prices were little changed on Tuesday.

Last week, the API reported a surprise draw of 2.739 million barrels of United States crude oil inventories for the week ending March 16, defying analyst expectations of a build of the same amount. It traded at $64.69 a barrel, down 86 cents, as of 4:42 p.m. EDT (2042 GMT).

Stephen Innes, head of trading for Asia-Pacific at futures brokerage Oanda in Singapore said there was "considerable resistance" as current or higher prices opened the possibility that even more USA shale producers could come back online.

While both contracts have been gaining, Jim Ritterbusch, president of Ritterbusch and Associates in Galena, Illinois said Brent has outperformed WTI.

That went against the received wisdom that as a yuan-denominated contract, it's primarily going to be bought by China's domestic duopoly of PetroChina and China Petroleum & Chemical, or Sinopec, with a smaller trickle heading to the handful of plants operated by Cnooc and Sinochem, plus the array of independent processors known as teapot refineries.

Brent and WTI, in contrast, were down by that time, weighed down by concerns over a looming United States trade dispute with China.

Supply curbs by Opec, Russia and their allies have helped push Brent above US$70 this year for the second time since late 2014, but analysts said this strength may not persist long.

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To attract more participation, China plans to waive income taxes for overseas individuals and institutions.

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

While the country hopes to establish a benchmark for global oil transactions, whether the Asian nation will achieve that goal has been the subject of hot debate. "[The new futures market would help enhance our] risk management ability against worldwide oil price volatility", said Dai Houliang, vice chairman and president of Sinopec in Hong Kong Monday. The obligation to trade Shanghai crudes in yuan will also add a currency risk to the market, which some traders are reluctant to take.

Meanwhile, crude futures that were tested in Singapore and Japan have since faded to obscurity due to low liquidity.

"Whether this will have any real bearing on the other crude benchmarks, I'm not quite sure, but traders love a new toy, so I applaud China for bringing in something that could stoke up some volatility", said Matt Stanley, a fuel broker with Freight Investor Services (FIS) in Dubai. Our short-term outlook and medium-term outlook on crude oil is bullish.

While he is not particularly watching it closely for the moment, ANZ's Chinese desk is very focused on it, he said.

Then there are the bulls, such as hedge fund Manager Adam Levinson, who says the start of a "petro-yuan" will be a "huge story" and increase the use of the Chinese currency in trade settlements.

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