The Petroyuan Cometh: Launch Of Renminbi-Denominated Oil Futures Contract Imminent

Tyler Durden's picture

Whenever one talks about the death of the petrodollar, the unspoken question lurking just beneath the surface is this: is the rise of the petroyuan just around the corner?

This year, we’ve gotten quite a bit of evidence to suggest that the answer to that question may indeed be a resounding “yes.” In May for instance, Russia surpassed Saudi Arabia as the largest oil supplier to China and what’s especially notable there is that beginning in 2015, Gazprom began settling all of its crude sales to China in yuan meaning that, at least partly, the petrodollar was supplanted just as soon as its death became inevitable.

Now, just as China has moved to play a greater role in determining the price of gold by participating in the LBMA auction and by establishing a yuan-denominated fix, it's moving quickly to create a yuan-denominated oil futures contract. Here’s Reuters:

China's push to establish a crude derivatives contract has been met with early scepticism, but oil executives say the country's growing economic influence means a third global crude benchmark is inevitable.

 

A derivatives contract would give the Shanghai International Energy Exchange, known as INE, a slice of an oil futures market worth trillions of dollars, offering a rival to London's Brent and U.S. West Texas Intermediate (WTI).

 

And while others have tried and failed, China brings its might as the world's biggest oil buyer, a strong dose of political will and the alignment of its financial and banking system for a yuan-denominated contract.

 

"The energy industry is still manned, literally, by people from the West. But the world moves on, and there's a change of guard," said a senior market executive, speaking on the sidelines of a major industry gathering in Singapore this week, at which delegates spoke on condition of anonymity.

 

"China has become the world's biggest oil trader, and that means that an oil price will be set there, like it or not."

To be sure, some people do not and China's recent adventures in propping up both the stock market and the yuan have, in the minds of many, served to reinforce the notion that when things aren't going Beijing's way, it will simply force the issue. Some fear the same thing could well happen with RMB crude futures:

"The market doesn't like the idea of a benchmark dominated by the world's biggest consumer, where the regulator is suspected of having the goal of lowering prices," said an executive with a non-Chinese exchange in Asia, speaking at the same event.

But skeptics may have to choose between the lesser of two (perceived) evils because as we saw last month in Singapore, pricing off Dubai leaves everyone subject to perplexing anomalies like what happens when mysterious trading between two Chinese SOEs ends up throwing the market into backwardation at a time when common sense dictates that everyone should be doing the contango tango.

The current benchmark for pricing oil in Asia in the absence of a derivatives contract is the Dubai crude assessment, run by Platts, part of McGraw Hill Financial, where trading in a specified time-frame is used to assess a daily price.

 

Yet traders have been concerned at heavy trading by China's state-owned Chinaoil and Unipec, which pushed up Middle East grades even as other grades were being pressued lower, and left other companies struggling to take part.

Essentially, it looks like Chinaoil and Unipec may be gaming the Platts Dubai MoC (although no one knows exactly why) and that has implications for all kinds of people including (obviously) Saudi Arabia, Iran, and Iraq, as well as refiners and traders like Mercuria and Glencore. The hope is that a RMB contract will help solve the "problem."

In any event, it makes no more sense to exclude the world's largest oil buyer from crude benchmarking than it does to keep the world's largest producer and consumer of gold out of the gold price-setting process, which is why, in short order, China will be heavily involved in both. And as for widespread adoption of the new contract, that, like the internationalization of the yuan and the demise of the petrodollar, is only a matter of time:

"One-by-one, the oil-majors will start to participate, then others will follow," said an executive with a Western oil major. "While it might take some time to establish itself due to choppy markets and regulatory hurdles as well as the fact that it would introduce a foreign exchange element to crude futures, it is overdue for a Chinese contract to established."

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Latina Lover's picture

About time. We need alternate price discovery, instead of relying solely upon contracts issued by corrupt western banking and oil entities.

LeBalance's picture

Great Britain begat USA

USA begat Soviet Union

and stockpiled for Mao.

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Central bank connects all.

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And you talk of price discovery as being possible with petroyuan?

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Check your history lesson.

nmewn's picture

No doubt.

Perhaps Vice Public Security Minister Meng Qingfeng is angling for a higher post in government ;-)

MSimon's picture

The USA has a counter to that.

 

Public Vice Security Minister. Offices in the San Fernando Valley. Video on request.

BC6's picture

Wasn't 'Murica the world's largest oil consumer for the past ~50 years? And it had no interest whatsoever in influencing lower oil prices?

Arnold's picture

The rabid tree huggers are calling carbon fuel obsolete, so this may be another ChiCom project to nowhere's ville.

I doubt that the commie elites will accept the middle ages again, much the same as the western leaders. Meanwhile two currencies sucking all available future debt for energy may be a point of global friction at some point./s

Mongolia  culture/ country might accept a new middle ages. It would be a step up.

RaceToTheBottom's picture

Follow the machines...

We shipped all our industrial machinery to china.  Now that machinery needs power.

All according to plan, just not the best plan for the US citizens...

alphahammer's picture
alphahammer (not verified) Latina Lover Sep 11, 2015 8:57 PM

LOL!

Right, because as we've all seen, the Chinese markets are the bastion of transparency and there is no manipulation via market partipants nor the Chinese gov...

 

 

LetsGetPhysical's picture

Ssshhhhhh...... You're ruining their fantasy. China is going to save the world form American hegemony by substituting it with Chinese hegemony. Everyone will hold hands and a giant unicorn will jump over a rainbow.

undertow1141's picture

While a great white shark with lasers for eyes shoots every banker in the crotch.

RaceToTheBottom's picture

But wait, where does a bare chested Putin fit into their bare-ly repressed fantasy?

Urban Redneck's picture

Not to throw a turd in the dollar death punch bowl, but this isn't alternate price discovery-

While a functioning engine is a prerequisite of a car getting you from point a to point B, an engine sitting on blocks in the yard is not the same.

A third benchmark in and of itself, won't move the dial, there are already over a dozen benchmarks.  Way back when... the EUR was going to dethrone the USD, they even launched EUR denominated paper oil contracts, but to this day there is no real (paper) EUR volume.

The Dubai benchmark is denominated in dollars, and more importantly trades- at a spread to Brent.  That is the crux.

It's a marathon, not a sprint, and the Chinese are at the two-mile marker right now.

agent default's picture

Unless of course something drastically changes in the Middle East.  Considering the latest developments, this may happen sooner than expected.

post turtle saver's picture

you're expecting hands-free, honest price discovery from communists? after what we've just witnessed in the last two months? I don't know what you're smoking, but it must be pretty strong stuff...

seriously, did you even read the article? NO ONE is expecting that from the ChiComs... get real...

Lone Deranger's picture

Maybe Goldman Sachs will build an office next door to their new exchange like they have in New York next to the NYMEX.

RaceToTheBottom's picture

Gordman Sarks?

 

The worldwide manipulation engine will not fail us now...

SilverRhino's picture

So ... what's the over / under until another chemical facility explosion? I'll take within 1 week

alphahammer's picture
alphahammer (not verified) SilverRhino Sep 11, 2015 8:49 PM

I've been there. It's a damned miracle the whole place hasn't ignited into a single fireball by now. I'm not shitting. I saw everything from severly overloaded trucks carrying barrels of something with big "danger/fire" type icons on them and the driver wheeling (with cigarette in mouth) like he was qualifying for the Indy 500. Then there were areas where the smell of something like paint thinner hung so heavy in the air you were scared shitless somebody would fart and we'd all go up.

Seriously, the entire place is a tinderbox fueled by a stew of massive amounts of questionable chemicals stacked chock a block. It's really amazing the whole damned place hasn't gone up by now.

Dickweed Wang's picture

I saw everything from severly overloaded trucks carrying barrels of something with big "danger/fire" type icons on them and the driver wheeling (with cigarette in mouth) like he was qualifying for the Indy 500.

Any chance that driver was near Tinjan recently??

Fish Gone Bad's picture

I think I know who you are talking about.  The guy is about 5'2" tall, dark hair, bangs, and smokes a lot.  He is a really bad dude.  Don't mess with him.

earleflorida's picture

yep?

and warren's RR's carry no toxic shit either

nor Monsanto's palaces fostering a utopian, 'garden-of-eden', nor GE's toxin death zones throughout america covered by nukes or coal fired plants

yep?

MSimon's picture

Well modern industry has risks. Chemistry on a large scale is dangerous. What the US does is to endeavor to limit the risk geographically. You can't store/make chemicals in residential neiggghborhoods. Well except for meth chemists and those doing butane extraction of cannabis. But those are functions of Prohibition.

 

You want the benefits of plastic? There will be chemical factories. You like computer chips? There will be Arsenic.

 

Risk/reward.

anonnn's picture

FYI---Humans are becoming aware of the Teflon [contaminant PFOA ? [aka C8 , or perfluorooctanoic acid.]

It is an unpleasant surprise; globally; kept quiet for decades; known to produce multigenerational genetic damage.

PFOA is released  at elevated cooking temperatures, apparently well above 212F. [boiling water], such as prep of fried foods using Teflon-type coatings for non-stick.

Teflon is a Dupont trademark. Similar plastics are made by others. The plastic is chemically known as PTFE, polytetrafluoroethylene and PFOA is used in processing and remains as a residue. 

 

MSimon's picture

Lots of new arbitrage opportunities. What could possibly go wrong?

Atomizer's picture

A phone and pen failed. Release fake money and declare another Government shutdown to declare 150 + days of treasury concealment.

We are going to have to shutdown the government states Jew Lew. It's for Wall Street, the darkpools are still in working mode of failare mode analysis recovery. 

F0ster's picture

To me at least, it appears that the US is going after the BRICS with everything they've got for this global bifurcation. China is deploying one of it's economic nuclear weapons against the US controlled financial system and dumping US treasuries. Make no mistake the war is in progress behind the curtain. 

MSimon's picture

The picture of Mao on their money?

 

Economic power comes from the barrel of a gun?

 

Not very libertarian.

 

Yea. The death of the petrodollar and don't you dare disagee.

ebworthen's picture

China has many more mouths to feed, and a much less somnolent populace.

And yes, oil = food in the modern world.

Rehab Willie's picture

can't wait for the petroloonie

hotrod's picture

In the search for Profits through NAFTA and other Fed Govt programs, we gave it all away.  Should have kept our manufacturing here and the jobs too.

q99x2's picture

Awh that paper's worthless and so was the war criminal printed on it.

all-priced-in's picture

Is the petroyuan pegged to the petrodollar?

 

Like Rudolph the red nosed reindeer and Hermey the elf dentist.

 

Were independent!

 

 

   

    

cornflakesdisease's picture

That's what I want, my wealth stored in a currency that can loose 10% of it's value in one day . .  .

oak's picture

in addition to au, ag and oil, what is the next, agriculture? if this happens, i would really worry about it, everyone needs to eat.

Luckhasit's picture

 

"the yuan have, in the minds of many, served to reinforce the notion that when things aren't going Beijing's way, it will simply force the issue"

The Fed is doing the same thing and so is the BOJ.  The difference is, even when it's financial industries melting down, China is still looking into the future.  And still making moves. 

When China gets to the point that they can buy oil for yuan, no matter the producer, that is going to hurt.

MSimon's picture

Hurt? I can't see it. To get the float we get from the petrodollar means we have to run a negative material account balance. We make up for it on the financial side. For the US manufacturing is a loss leader.

 

So China wants its industries to become a loss leader so it can make up the difference in financials? In one of the less trusted currencies?

 

Good luck with that.

RighteousDude's picture

Why just oil? To be legit, must offer ALL commodities!

Would YOU accept Yuan for payment??

Kprime's picture

I have read most of the comments on this thread and I believe everyone including the author is totally blind to the elephant in the room.

In the future oil won't be traded in petrodollars, or Yuan, or Rembini , Pataca, Pesos, Marks, Euros, Yen, nor central bank paper of any kind.  The coming world currency or reserve currency will be none of the current known or future conjured currencies.  I will not be getting my SS benefits in dollars, paper or digital.  Pensions will not be paid with direct deposits of fiat bits or paper.  Cash will be banned.

The future belongs to the universally traded concept known as Derivatives.  My SS benefits will be delivered as the new world currency, derivative contracts.  At the gas station I will pay for gas with Derivatives.  I will buy my food with Derivatives.  The whole world uses the same creation to trade.  The Almighty Derivative.  Without a Derivative you are less than a third world county.  What's in your wallet? DERIVATIVES!

"China's push to establish a crude derivatives contract has been met with early scepticism, but oil executives say the country's growing economic influence means a third global crude benchmark is inevitable.

 A derivatives contract would give the Shanghai International Energy Exchange, known as INE, a slice of an oil futures market worth trillions of dollars, offering a rival to London's Brent and U.S. West Texas Intermediate (WTI)."

What no derivatives?  Don't call us, we'll call you.

Atomizer's picture

Perhaps you're correct. How long would they need to extend terms of contract? 50 or 100 years? Investors will be dead to receive payout in investment scam.

Do you remember the century bond bullshit they were trying to peddle during TARP and American Reinvestment and Recovery Act?

Bopper09's picture

You will only be issued derivatives if your household debt ratio is above 300%.

Atomizer's picture

Obama regime will issue the Choomdollar universal currency. It will use climate change carbon rainbow credits to zip unicorns around in depositing reward points too buy more needless shit.

Jack Oliver's picture

China is becoming less reliant on fossil fuels - I mean they ARE going to run out - China thinks in 'next thousand year terms' - Telsla discovered AC/DC current - we are still using it today - He also discovered FREE radiant energy available 24/7 in unlimited renewable quantities - breaking away from the petrodollar is the first step - the freedom to take on the energy giants with previously 'suppressed' energy technology is the next step - this could go a long way toward healing the planet ! 

surfersd's picture

The delivery point for this crude is going to be into the port of Shanghi. While three of the crudes will be a medium sour one will be a domestic crude from onshore China. I can't imagine we are going to see a lot of companies wanting to trade a contract where there is no visibility into the supply of one of the crudes or knowledge about the buying habits of the Chinese refiners. We just saw the debacle of the Shanghi future index which has seen volume drop 99% in the last three months.

Stick with ICE and NYMEX oil futures if you want to play the oil game. The Shanghi contract will be luck to get off the ground.

 

 

 

EastCoast90's picture

So China wants to sign up for the U.S Military "freedom tour" as well? 

KashNCarry's picture

Oil barons!  Meet the new Don Yuan...

Element's picture

It's hilarious, people seem to have this one eyed version of reality where China is no just as indebted and a debt basket-case as the US, but a China petro-yuan will be more credible than the buck?

Yeah ...  ... suuuure it will be ... ... phft 

Jus make sure they pay the gas bills on time when they come unstuck, pootie.

jcdenton's picture

Let me ask you something genius. If say (per sources Bill Holter, Jim Sinclair et al) you have one country that possesses some 10,000 metric tonnes of gold bullion. And we have another country that at one time had ~8000 metric tonnes, but at present probably has zero tonnes. Well then, you fill in the remaining blanks.

A little caveat:

The one country that had the 8000 tonnes, has guaranteed at least 2000 metric tonnes. It is not in Fort Know at present. Let's say it is offshore at this time. It's safer than Fort Knox (believe it or not). It's a "rainy day" fund in the event of an emergency. A national emergency at that. There's another amount attached to this (meaning same sole owner at present). 2000 tonnes is ~$80 billion USD. If we were to calculate the other amount in bullion, then it would be ................... well, let's say conservatively well in excess of 100, 000 tonnes ....................... X ........................... 8 ..

Now that is quite staggering. But, this is all very true. Someone did some forward-thinking about 35 years ago ..

https://app.box.com/s/hfgvcqg7gqh7i27at6sv53ywu87lwarp

At the same, this American exceptionalism .................... has got to go ..