Trading giants lead way as China challenges global oil benchmark

Glencore Plc and Trafigura Group, two of the world’s biggest commodity giants are leading the way in China’s challenge of global oil benchmark; giving the country’s crude futures contract a go on its long-anticipated trading debut.

The largest oil traders were among foreign participants as the yuan-denominated futures started on the Shanghai International Energy Exchange Monday. After an initial surge in volume that outpaced overnight transactions in global benchmark Brent crude in London, trading tapered off toward the end of the session and the contract closed at 429.9 yuan a barrel ($68.22).

In a first for Chinese commodities, the futures are open to foreign participation, which is seen as critical to the long-term success of the contract. The world’s biggest oil buyer wants to challenge the dominance of Brent and New York’s West Texas Intermediate as global benchmarks and promote the use of the yuan in international trade, a key goal for Asia’s biggest economy.

While it remains to be seen whether they’re in it for the long haul, the participation of Glencore, Trafigura and other foreign investors in the contract’s debut is a boon. In the build-up to the launch, which has been 25 years in the making, skeptics said foreign investors would be put off by China’s capital controls, regulatory risk and government intervention in the yuan.

“China has used this contract in an innovative way, to fill in the void of a voice representing buyers in Asia,” said Li Li, an analyst with Shanghai-based commodities researcher ICIS-China. “With this launch, the market will pay more attention to China’s demand story.”

Futures for September settlement, the most active contract, opened at 440 yuan a barrel, up from a reference price of 416 yuan. About 20,300 contracts changed hands over the course of the day, which excluded an additional five and half hours of overnight trading.

At one point, volume eclipsed trading in front-month Brent futures, which is typically lightest during the Asian day. But by 5 pm Shanghai time, 37,655 of those Brent contracts had changed hands. The daily average is about 285,000 for March. September Brent and WTI traded near $68.22 a barrel and $63.94, respectively, on Monday.

It wasn’t a febrile start to trading, which may be exactly what the Chinese authorities intended. They’ve frequently had to step in to quell speculation in the country’s commodities exchanges over the past few years as unprecedented trading by retail investors caused prices to swing violently.

One way of tempering the froth has been to limit physical delivery space for the oil barrels as well as set storage costs that are double the rate elsewhere. The Chinese government would rather have a slightly slower or softer launch so it doesn’t have to intervene early on in a market that’s bubbling too quickly, said Michal Meidan, an analyst at industry consultant Energy Aspects Ltd.