China extends its influence on the crude oil market to pricing

Weekly Oil Markets Recap - Running Out Of Toilet Paper

Traders said most pressure ensued after the American Petroleum Institute (API) on Tuesday reported a surprise 5.3 million barrels rise in crude stocks in the week to March 23, against expectations for a decline of to 430.6 million barrels.

The long-awaited contracts are traded on the Shanghai International Energy Exchange at price of 432.3 CNY per barrel (68.47 USD) for delivery in September.

On the first trading day, the 15 listed crude oil contracts changed hands in a total of 42,300 transactions.

Nearly 30,000 lots of the most-active September contract, had traded, equivalent to about 15 million barrels of crude.

However, the contract will also come with quirks that traders used to London's Brent or U.S. West Texas Intermediate (WTI) may find less appealing, including shorter business hours, unique Chinese trading habits and extended holiday breaks.

"The emergence of a new financial oil price benchmark in Asia has been long-awaited and may prove to have a significant influence over the oil markets in the years to come". Treasury Secretary Steven Mnuchin said on Fox News that he's optimistic the US can reach a truce with China on trade.

The American Petroleum Institute (API) has reported a major surprise build of 5.321 million barrels of US crude oil inventories for the week ending March 23, with the market expected to respond by erasing last week's gains.

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On the other hand, China is not leaving everything to market forces. Our short-term outlook and medium-term outlook on crude oil is bullish.

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

At the same time, recent "strength in oil has come on the back of strong supply and demand fundamentals as evidenced by recent USA data which shows total US oil stocks more or less flat over the past four weeks", according to analysis at consultancy JBC Energy.

Skeptics argue that hurdles, such as capital controls, regulatory risk and market intervention in other Chinese securities have made investors cynical about the prospect of Shanghai futures becoming a regional price setter. Such obstacles kept foreign investors away from the major stock and bond markets in the mainland.

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.

Unipec, trading arm of Asia's largest refiner Sinopec, has inked a deal with a western oil major to buy Middle East crude priced against the Shanghai futures contract, a senior company official said on Monday. It traded at $64.69 a barrel, down 86 cents, as of 4:42 p.m. EDT (2042 GMT).

"The trade war story should be taken into account when trying to quantify the potentially bullish effect of the geopolitical element in oil markets", said analysts at consultancy JBC Energy.

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