Yuan-denominated crude futures make steady progress

China's crude oil futures contracts have so far been widely considered a success, yet the market still has a long way to go to catch up with mature international crude benchmarks, analysts said.

The trading volume and open interest of the crude oil futures contract at the Shanghai International Energy Exchange has been steadily increasing, a positive sign in the two and a half months since trading began, said Zhang Hongmin from the exchange.

The trading volume hit 65,000 lots per day and 3.5 million lots in total by the end of June 8, with daily transactions reaching 30 billion yuan ($4.7 billion), he said.

The Chinese futures market unveiled the yuan-denominated crude oil futures contract on March 26, the first of its kind that is open to overseas investors, setting a crude oil pricing benchmark that insiders believe better reflects supply and demand in China and Asia.

According to S&P Global Platts, while many State-owned oil majors and industry players have been trading the crude contract since its launch, retail and financial investors make up the bulk of trading.

Retail investors, including individuals and short-term day traders, contributed significantly to the recent sharp boost in market liquidity, as such participants typically hope to take advantage of sharp price fluctuations to take quick profits, it said.

Analysts said that despite the current success, the Shanghai crude oil futures market is still very small compared to existing international crude benchmarks in terms of trading volume and open interest, including the benchmark West Texas Intermediate benchmark from the United States and Brent from the United Kingdom.

Whether Shanghai's contract can succeed is yet to be seen, said Li Li, energy research director at ICIS China, a consultancy that specializes in the energy market.

China is taking the lead thanks to innovative measures, as the launch of crude oil futures is making up for the lack of a crude oil benchmark in Asia, giving companies in the real economy a bargaining tool when importing crude, she said.

The market is looking forward to the further opening-up of China's oil market, including the greater involvement of private companies, to push forward and contribute liquidity in the new derivative market, according to Li. The more players allowed in the market, the greater the boost to trading interest, she said. Jonty Rushforth, senior director of the energy price group at S&P Global Platts, said that whether the futures market can succeed in the long term depends on whether the administrators are persistent, flexible and willing to experiment.

So far, there are 40 to 50 foreign investors with a combined trading volume accounting for no more than 10 percent of the total, Zhang said. Leading overseas companies, including Glencore PLC, Trafigura Pte Ltd and Free-point Commodities LLC, were among the first to trade on the contract's first trading day.

Overseas institutional investors' income from crude oil futures transactions was temporarily exempted from enterprise income tax so as to attract more overseas capital at launch, as per a Ministry of Finance announcement in March.