China to Launch New Oil Futures Contract, Could Seize Control of Oil Prices

The new contract is expected to debut on the Shanghai International Energy Exchange as early as October.

China is expected to offer its own oil futures contract as early as next month, signaling a bid to wrest control of oil prices away from current benchmark Brent, The Telegraph reports.

Commodities editor Andrew Critchlow notes that Brent Crude has long been the preferred benchmark despite now only accounting for 1 million barrels per day (bpd) of the world's 92m bpd total physical supply.

It was originally introduced in 1988 as a way to stabilise prices for the world's biggest consumers in the West, which were becoming increasingly volatile and dictated by the majority Middle East producers.

China, the world’s second largest economy and second largest consumer of oil, now looks set to launch its own bid to stabilse pricing on its own terms, with traders said to be already speculating that the new contract on the Shanghai International Energy Exchange (INE) could grow to take precedent over Brent and West Texas Intermediate (WTI).

The contract is expected to be denominated in yuan, and also comes at a time when China is actively liberalising its physical supply market.

"Developing a futures contract is the logical next step for China now that it has developed into a major power in the physical market for crude oil," said Critchlow, adding that Organisation of the Petroleum Exporting Countries (OPEC) producers such as Saudi Arabia and Iraq have already been "competing fiercely to win a greater share of a market they see being the future of the industry."

Reuters notes the move will also give a boost to the use of the yuan.

"The development of a futures market is closely linked to the physical market," the INE was quoted as saying in separate reports.

"The more physical players participate, the better the liquidity of the futures market will be."

At the same time, the importance of Europe in the physical supply market is expected to decline as the continent increases its emphasis on fuels the meet tightening environmental legislation.

If China's new contract was to replace Brent as the dominant crude benchmark, there could well be consequences for the bunker markets.

As Ship & Bunker reported last year IFO380 prices have typically been tracking Brent at between 70 and 75 percent of the crude price.

Last month, Ship & Bunker reported that during a huge price slide at the end of August that relationship widened as bunkers got cheaper relative to crude.