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SHFE's crude oil contract to transform trade

Keywords: Tags  Newedge Financial Singapore, Sebastian Pang, crude oil, SHFE, Shanghai Futures Exchange, oil contract, copper

SINGAPORE — The commodity futures trade in China will be transformed by the Shanghai Futures Exchange’s (SHFE’s) proposed crude oil contract as the exchange looks at how to facilitate offshore involvement, according to Sebastian Pang, head of energy APAC ex-Japan at Newedge Financial Singapore Pte Ltd.

"The crude oil contract we are talking about will be a great game-changer because there will be a new set of rules," Pang, who is working on the design committee of the new contract at the SHFE, told AMM sister publication Metal Bulletin.

The crude oil futures contract has been granted in-principle approval from authorities but still needs final approval, Pang said.

The contract will be a physical delivered dual-currency contract, will have an aggregate quota for funding offshore trading, and can be traded in bonded warehouses.

Metals brokers and traders are watching SHFE’s plans for crude oil futures closely because they believe it could provide a model for the exchange’s plans in copper.

Under the draft being considered, the contract provides two quotes—dollar and yuan—and it could be a dollar-cleared or yuan-cleared contract, or both, Pang said. "If they make it international, it will create more demand for the renminbi, and if it’s in dollars, then it’ll create a demand for dollars," he said.

The contract is now expected to launch before year-end. It was previously expected to launch by the end of 2012 but was delayed by political leadership changes in China.

There are five ways for foreign companies to trade the contract, Pang said, noting that all must be done through an onshore entity.

"They have not thought of a category whereby a foreign entity goes onshore and can clear; so far as I know, it’s not part of the plan," he added.

The contract will be the world’s first c.f.r. crude oil contract, which is "very attractive, because when you have global surplus or shortages, the whole world can actually start to move the marginal barrels to or away from (China)," Pang said.

An f.o.b. contract didn’t make sense because China isn’t the producer, but a consumer.

"This is a new contract, and it’s testing a lot of new boundaries," Pang said.

A version of this article was first published by AMM sister publication Metal Bulletin.

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