A third crude oil price emerged last week from China, creating a third price indication in the oil market that could be a dominating force in the coming years like Brent crude oil and USA West Texas crude oil price indicators in deciding the final price for the end consumers.
Today Shanghai futures will be represented by a sour heavy type crude oil, which is popular in the Asian markets, compared to the sweet-type Brent and USA crude oils. This will open the door for a varied representation that could enhance price transparency in the global oil market.
It is a long shot to get recognition but it could be the first step. However, there are some big obstacles that could threaten its longevity.
Shanghai futures will be based on local Chinese Yuan currency which is not heavily traded. Also, there are restrictions in moving out Yuan from the country. It could be used for the purpose of encouraging and internationalizing its currency.
China now is the biggest importer of oil and the second highest oil consumer in the world. It is working on overtaking the USA economy. It is only fair for it to be able to determine or have its own input concerning the price of oil that is consumed and imported daily inland.
The new oil futures consist of seven types of crude oil, six of which are from the Arabian Gulf oil producer while the seventh type is Chinese crude oil type. It is a heavy and high-Sulfur type of crude oil, the same type that the Chinese refineries consume.
It is a good sign that a new price indicator is created; however, it will be highly exposed to great speculations that would be used mainly as speculation vehicle rather than a genuine price indicator. Nevertheless, this will be corrected eventually but meantime, we can say that it perhaps is on the right track.
Surely, Shanghai oil futures is good news, but will it get recognition in many years to come?
By Kamel Al-Harami
Independent Oil Analyst