China Crude Oil Futures Come out How Does it Affect Shipping and Shipbuilding?

By Chen Lu and Wang Sun

China’s first internationalized futures variety -- China Crude Oil Futures was listed on the Shanghai Futures Exchange on March 26. An industry source told the reporter that as the first financial product with no special limitation to overseas investors,the listing of China Crude Oil Futures helps boost China market pricing ability,provides hedging channel for domestic oil enterprises, and constantly drives the renminbi internationalization process.This will bring good benefits for crude oil related international shipping enterprises,but with very limited impact on the shipbuilding industry.

The launching of China Crude Oil Futures is deemed significant. An industry source said: “The listing of China Crude Oil Futures mainly affects game rules of the crude oil market.”Previously, there were WTI and Brent crude oil futures as the futures benchmark prices. Although many countries including oil consumers such as Japan and India and oil producers such as Russia set up crude oil futures exchanges,their scale was so small that the global crude oil futures market was basically controlled by New York Mercantile Exchange and London International Exchange, the two exchanges combined to account for 97.27% of the global oil futures transactions and the international market was expecting for long the futures benchmark price representing Asia.

An industry source held Asia-Pacific as the current largest crude oil consumption and import region has been in a passive position, as a price system reflecting regional oil market supplydemand relations has not been formed,and the supply-demand relations cannot be truly reflected. As Asian second largest economy, global largest crude oil importer and second largest crude oil consumer,China has formed an RMB6.5 trillion worth of huge industrial chain and consumption system centering on crude oil.

According to the National Bureau of Statistics, China crude oil import broke 400 million tons in 2017; crude oil import reliance climbed year by year, and as of May 2017, domestic crude oil import reliance approached 70%. Due to violating international oil price fluctuations, Chinese petroleum upstream and downstream enterprises faced large operating risk. Therefore,the introduction of the crude oil futures by China will jointly build a space-time system with WTI and Brent, win over the petroleum pricing power, reduce effect of international oil price fluctuations on domestic oil related enterprises, accelerate renminbi internationalization, thus changing the entire game rule.

Merely from international crude oil price fluctuation trend, the listing of China Crude Oil Futures has slight impact on the oil price market; on the contrary,international crude oil price fluctuations directly affect China Crude Oil Futures price. However, the listing of China Crude Oil Futures will make domestic market consumption demand more reasonable and will deepen link between international and domestic markets. An industry source noted this will bring many benefits for the development of the shipping industry and especially the oil shipping market.

In the first place, the new futures market will certainly bring about regional trade increase. The possession of the new deal platform boosts increasing crude oil transactions between China and Latin America, and subsequent transport demand growth will constantly boost shipping capacity and help dissolve surplus capacity. It’s worth noting that out of seven crude oil varieties available for deal in China Crude Oil Futures, six come from the Middle East. Relevant figures show the six ME crude oil futures delivery oil product countries registered almost no export growth to China in recent five years. The listing of China Crude Oil Futures will help open up the ME petroleum market, thus boosting further development of the ME-China oil shipping route.

Secondly, implementing the bonded delivery system will promote development of the crude oil transshipment market.Asia, especially East Asia region, is the global largest crude oil import region. With the launch of China Crude Oil Futures, commercial reserves of bonded crude oil in East Asia will further increase, construction of relevant storage tanks and wharf infrastructure will further increase, offering very large development space for futures market,thus further optimizing bonded resources.For example, previously, crude oil was shipped to a Chinese, Japanese or Korean wharf from the ME for direct disembarkation, but now with huge warehousing resources in Chinese coastal bonded zones, short-distance crude oil trade between China, Japan and Korea will become more developed and will catalyze re-distribution of the regional warehousing resources.

Finally, reducing “Asian premium” helps reducing crude oil import cost. For long, as Asia has no crude pricing power, in circumstances not considering freight difference, prices at which major consumption countries pay to the ME petroleum producers were higher than those at which European and American countries paid for crude oil imported from the same region by USD1-1.5/barrel. “Asian premium”made China pay additional USD3 billion for crude oil import every year. What underlies behind is consumption demand and pricing power separation issue in existing crude oil pricing system. The establishment of China Crude Oil Futures market undoubtedly fills in the blank of Asian region pricing benchmark and improves the pricing system of the global crude oil market. When more countries are inclined to renminbi settlement and use Chinese quotations, “Asian premium” will automatically disappear.Nevertheless, an industry source said spot transshipment market development in hedging trade is affected by futures price difference in the three places, if market prices of the three places are inclined to be consistent, hedging trade will be curbed; existence of hedging space will stimulate transshipment business development. Due to non determination of futures price in three localities, there is no exact conclusion.

From shipbuilding industry perspective, industry players are generally cautious about whether the listing of China Crude Oil Futures will boost newbuilding order growth.Ship form demand and futures market relations are not close, new ship demand growth or reduction depends on digestion of surplus shipping capacity.“It cannot change the pattern of the whole crude oil transport or supply-demand trading after all, with unpredictable effect on the shipbuilding market,” noted an industry source.