In 2021, as the internationalization of China's renminbi accelerates, the Chinese domestic futures market will become more and more open to foreign investors. Direct Access USA LLC is committed to helping to provide its clients with these developing global investment opportunities. This special series "Direct Access to China’s Futures Markets" will regularly provide customers with important information about the Chinese futures markets, including featured product introductions, and other useful facts and data.
Shanghai Crude Oil Futures Series (1)
The Shanghai International Energy Exchange (“INE”) launched its Shanghai crude oil futures on December 12, 2014. It was China’s first futures product open to international investors.
A. Contract Specification
B. Why choose medium sour crude oil as the underlying deliverable product?
First, the resource of medium sour crude oil is relatively abundant, and its production share accounts for about 44% of global production; second, the supply and demand relationship of medium sour crude oil is not the same as that of light sweet crude oil. The current international market still lacks an authoritative price benchmark for medium sour crude oil. Third, medium sour crude oil is the main type of crude oil imported by China and neighboring countries, and the formation of a benchmark price for medium sour crude oil is beneficial in terms of promoting and developing international crude oil trading in the Asia-Pacific region.
C. What is the difference between Asia Pacific crude oil pricing and North America and Europe? What opportunities does China present?
Asian countries historically have imported the same quality crude oil from the Middle East at a higher price than European and other Western countries, forming what some call the “Asian premium." The primary reason for this: that the crude oil pricing mechanism is different. The crude oil import prices in North America and Europe are based on the crude oil futures prices in the consuming regions, while the Asia-Pacific crude oil imports are based on the spot prices of crude oil producing regions in the Middle East, without a mature crude oil futures market designed to help Asian consumers avoid risks of price fluctuations. Without the key price discovery mechanism of an oil futures market, Asian importers faced greater risks, hence the “Asian Premium” on oil sold in in the Asian Pacific arena.
At present, about 50% of China's imported crude oil is Middle East produced medium sour crude. As China's share in the international crude oil market (especially the medium sour crude oil market) continues to increase, it is possible for China to establish a relationship between the supply and demand of crude oil in the region, which is different from WTI and Brent (especially the medium sour crude oil market). Therefore, the launch a crude oil futures contract that focuses on the Asian region provides China with a price discovery mechanism and potentially a greater international influence in terms of global oil trade.
D. What are the four ways of participation for foreign customers?
Four ways of global participation accesses to INE are:
I: through domestic futures firms (a corporation that registers in Chinese mainland and approved by INE) authorized as their direct agents.
II: through Overseas Intermediaries (an overseas broker that does not trade directly at the Exchange but authorizes a Futures Firm Member or an overseas broker to conduct trading and clearing activities) who in turn engage domestic futures firms or Overseas Special Brokerage Participants (“OSBP”)
III: through OSBPs as their agents
IV: as Overseas Special Non-Brokerage Participants (“OSNBP”)
OSBP and OSNBP are both Overseas Special Participants that satisfies the prescribed conditions of China Securities Regulatory Commission (“CSRC”) and the Exchange.
Since DAUS’s parent company, DA International Financial Service Ltd, is already approved as Overseas Intermediary DAUS can help client to enter INE market for crude oil futures trading through the way mentioned above in II.
Figure below is diagram of participation mode of foreign investors.
Figure source: INE Crude Oil Futures Trading Handbook (2020.3 Version)
The above is a brief introduction about INE crude oil futures and the entry ways for overseas customers. We plan to provide more information about Shanghai crude oil futures in the next issue. If you are interested in Shanghai crude oil futures or China's futures market, please feel free to contact us via our website address, phone, or email below. We will be happy to answer any relevant questions. Site address: https://www.directaccessusa.com/