China’s oil futures post mysterious gains

BEIJING (Bloomberg) -- The crude futures that China launched in March with ambitions to rival U.S. and European benchmarks seem to be dancing to an oil-market tune only they can hear.

The Chinese contract for September delivery jumped on Tuesday by its daily limit to a record in Shanghai and has advanced almost 5% in August. By contrast, both Brent crude in London and West Texas Intermediate in New York are little changed this month. The yuan-denominated futures have posted gains on most days over the past two weeks while those priced in dollars have been pinned in a tight range.

That’s all occurring as global oil investors are grappling with doubts over how demand will be affected by flaring trade tensions between the U.S. and China, the prospect of lower exports from Iran due to American sanctions, uncertainty about Saudi Arabia’s output strategy and a fall in stockpiles at the storage hub in Cushing, Oklahoma. While the conflicting forces have led to price volatility in Brent and WTI, the yuan futures are posting unfettered gains.

“The price action does not do the contract any favor as it shows how speculative day-traders remain firmly in control and with that we can see temporary dislocations to the international market,” said Ole Sloth Hansen, head of commodity strategy at Saxo Bank in Copenhagen. “If there was a proper link to the outside world, arbitrage activity would ensure a proper pricing of the contracts but that has clearly not happened yet.”

In another striking move in August, open interest and volume on the December contract has soared after staying low for months. While the Shanghai International Energy Exchange has taken steps to encourage activity beyond the front-month September futures, trading in contracts for October, November, January and February continue to remain weak.

The month for which the bourse hasn’t reduced trading fees or margin ratio requirements to boost participation? December.

There could be several reasons behind the Shanghai contract’s individualist streak. A weaker yuan may be making commodities priced in the local currency cheaper to acquire than dollar-denominated contracts elsewhere, according to Bruce Xue, an analyst with Haitong Securities Co.

Additionally, as China limits purchases of U.S. crude amid the trade war and risks of Middle East supply being disrupted by American intervention increase, speculation is rising that the world’s top oil importer may find itself short of cargoes, he said. President Donald Trump’s administration is set to impose sanctions aimed at curbing Iranian oil exports that will go into force in early November.

The sudden popularity of the December contract versus November or October may have its roots in the traditional preference for Chinese commodity speculators to trade futures on a quarterly basis rather than monthly, according to Xue.

Data compiled by Bloomberg show that investors in Shanghai are holding contracts on average for an estimated time of under 2 hr since their debut, compared with more than 65 hr for London’s Brent crude during the same period, signaling the speculative zeal of the trading in China.

The Shanghai crude futures rose to 537.2 yuan ($78.55)/bbl, climbing by its daily limit of 5% against Monday’s settlement price. Brent crude, the benchmark for more than half the world’s oil, was up 0.5% at $74.13/bbl in London, while U.S. WTI was 0.3% higher at $69.23 in New York.