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."