'PetroYuan' Futures Launch With A Bang, Volume Dominates Brent As Big Traders Step In

As we detailed previously, China’s yuan-denominated crude oil futures launched overnight in Shanghai with 62,500 contracts traded in aggregate, meaning over 62 million barrels of oil changed hands for a notional volume around 27 billion yuan (over $4 billion).

As OilPrice.com's Tsvetana Paraskova notes, Glencore, Trafigura, and Freepoint Commodities were among the first to buy the new contract, Reuters reports.

After an initial surge in volume that outpaced overnight transactions in global benchmark Brent crude in London, trading tapered off toward the end of the session

Within minutes of the launch, the price had gone up to almost US$70.85 (447 yuan) from a starting price of US$69.94 (440.4 yuan) per barrel. The overall price jump for the short trading session came in at 3.92 percent.

Many awaited the launch eagerly, seeking to tap China’s bustling commodity markets, although doubts remain whether the Shanghai futures contract will be able to become another international oil benchmark. These doubts center on the fact that China is not a market economy, and the government is quick to interfere in the workings of the local commodity markets on any suspicion of a bubble coming.

To prevent such a bubble in oil, the authorities made sure the contract will trade within a set band of 5 percent on either side, with 10 percent on either side for the first trading day. Margin has been set at 7 percent. Storage costs for the crude are higher than the international average in hopes of discouraging speculators.

As a result of these tight reins on the new market segment, some analysts believe international investors would be discouraged to tap the Shanghai oil futures. If the first day of trading is any indication, however, this is not the case, at least not for large commodity trading firms.

While it remains to be seen whether they’re in it for the long haul, the participation of Glencore, Trafigura and other foreign investors in the contract’s debut is a boon.

On the other hand, China is not leaving everything to market forces.

One energy consultant told Reuters that:

“The government (in Beijing) seems determined to support it, and I hear a number of firms are being asked or pressured to trade on it, which could help.”

PetroChina and Sinopec are seen as instrumental in providing long-term liquidity for the new market as well.

Additionally, Bloomberg reports that contract grades in Shanghai crude oil futures exchange could account for around 200 billion yuan in trades, based on China’s current import volumes, helping the nation in its efforts to internationalize its currency, Wood Mackenzie’s research director Sushant Gupta says in an emailed note.

Woodmac expects China’s crude import requirements to grow by ~2.1m b/d from 2017 to 2023, noting that incremental oil-requirement growth in China is much larger than any other country - meaning China would want to play a more active role in influencing the price of crude oil.

Trades on Shanghai International Energy Exchange, also known as INE, will enable China’s crude-buying patterns to become more transparent to the world in the longer term, and will reflect China's crude supply-demand dynamic, becoming a reference for China’s crude market (which is likely to have a bigger influence on global prices).

Woodmac expects INE prices to influence Basrah Light, Oman prices as a start as the grades account for a significant portion of contract volumes. China imports ~600k b/d of Oman crude which is large enough to start influencing Oman prices, which are retroactively set by the Oman Ministry of Oil and Gas.

Interestingly, as the PetroYuan started trading, so offshore yuan began to rally and has extended those gains today...

As we most recently noted, after numerous "false starts" over the last decade,  the “petroyuan” is now real and China will set out to challenge the “petrodollar” for dominance. Adam Levinson, managing partner and chief investment officer at hedge fund manager Graticule Asset Management Asia (GAMA), already warned last year that China launching a yuan-denominated oil futures contract will shock those investors who have not been paying attention.

This could be a death blow for an already weakening U.S. dollar, and the rise of the yuan as the dominant world currency.

But this isn’t just some slow, news day “fad” that will fizzle in a few days.

A Warning for Investors Since 2015

Back in 2015, the first of a number of strikes against the petrodollar was dealt by China. Gazprom Neft, the third-largest oil producer in Russia, decided to move away from the dollar and towards the yuan and other Asian currencies.

Iran followed suit the same year, using the yuan with a host of other foreign currencies in trade, including Iranian oil.

During the same year China also developed its Silk Road, while the yuan was beginning to establish more dominance in the European markets.

But the U.S. petrodollar still had a fighting chance in 2015 because China’s oil imports were all over the place. Back then, Nick Cunningham of OilPrice.com wrote

Despite accounting for much of the world’s growth in demand in the 21st Century, China’s oil imports have been all over the map in recent months. In April, China imported 7.4 million barrels per day, a record high and enough to make it the world’s largest oil importer. But a month later, imports plummeted to just 5.5 million barrels per day.

That problem has since gone away, signaling China’s rise to oil dominance…

The Slippery Slope to the Petroyuan Begins Here

The petrodollar is backed by Treasuries, so it can help fuel U.S. deficit spending. Take that away, and the U.S. is in trouble.

It looks like that time has come…

A death blow that began in 2015 hit again in 2017 when China became the world’s largest consumer of imported crude

Now that China is the world’s leading consumer of oil, Beijing can exert some real leverage over Saudi Arabia to pay for crude in yuan. It’s suspected that this is what’s motivating Chinese officials to make a full-fledged effort to renegotiate their trade deal.

So fast-forward to now, and the final blow to the petrodollar could happen starting today. We hinted at this possibility back in September 2017

With major oil exporters finally having a viable way to circumvent the petrodollar system, the U.S. economy could soon encounter severely troubled waters.

First of all, the dollar’s value depends massively on its use as an oil trade vehicle. When that goes away, we will likely see a strong and steady decline in the dollar’s value.

Once the oil markets are upended, the yuan has an opportunity to become the dominant world currency overall. This will further weaken the dollar.

The Petrodollar’s Downfall Could be a Lift for Gold

Amongst all the trouble ahead for the dollar, there are some good news too. The U.S. might have ditched the gold standard in the 1970’s, but with gold making a return to world headlines… we could see a resurgence.

For the first time since our nation abandoned the gold standard decades ago, physical gold is being reintroduced to the global monetary system in a major way. That alone is incredibly good news for gold owners.

A reintroduction of gold to the global economy could result in a notable rise in gold prices. It’s safe to assume exporters are more likely to choose a gold-backed financial instrument over one created out of thin air any day of the week.

Soon after, we could see more and more nations jump on the bandwagon, resulting in a substantial rise in gold prices.