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China’s Crude Oil Futures Contract: It’s Characteristics, Trading History, and Potential for Success
37th USAEE/IAEE North American ConferenceNovember 3-6, 2019
Denver, Colorado
Ronald D. Ripple, PhD
Energy Economist
R.D. Ripple & Associates
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David C. Broadstock, PhDAssistant Professor
Hong Kong Polytechnic University
Outline
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• We will examine the (relatively) new Shanghai International Energy Exchange (INE) crude oil futures contract
• We will compare it to the contracts on the New York Mercantile Exchange (NYMEX) and the Intercontinental Exchange (ICE)
• We will look at trading patterns and prices
• We will focus on the assessment of contract success
How is success measured—Success for whom?• Virtually all published papers and media coverage I have seen assess
success from the perspective of the EXCHANGE.• The main focus here then is on trading volume• The exchanges make money by charging traders (both sides of every transaction) for
each trade
• A sample of papers, including recent focused on the INE contract:• Sandor, R. (1973) “Innovation by an exchange: A case study of the development of the
plywood futures contracts”, Journal of Law and Economics.
• Silber, W.L. (1981) “Innovation, competition, and new contract design in futures markets”, Journal of Futures Markets.
• Ji, Qiang and Zhang, D. (2019) “China’s crude oil futures: Introduction and some stylized facts”, Finance Research Letters.
• Platts (2019) “Insight from Shanghai: China’s international crude contract marks first birthday”. Available at blogs.platts.com/2019/03/27/china-shanghai-crude-futures.
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• I believe an equally (perhaps more) important perspective is from that of hedgers• It has been argued, even by some of the above noted papers, that if hedgers needs
are not met contracts tend to fail relatively quickly
• I judge this perspective of success from observations of open interest (OI)• OI represents the volumes that may actually be delivered, and this represents the
share of market exposure to market price risk
• Trading volume is not unimportant, even from this perspective, but it does not dominate• Trading volume is quite important for price discovery and liquidity• But OI is most important for risk mitigation
• Does the contract represent an improvement over existing hedging options?• This may be captured by examining the relationships among the available futures
contract prices
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How is success measured?
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Product Medium Sour Crude Oil
Contract Size 1000 barrels per lot
Price Quotation
(RMB) Yuan per barrel
(no tax or duty included in the
quotation)
Minimum Price
Fluctuation 0.1 Yuan / barrel
Daily Price Limits ±4% from the settlement price of the
previous trading day
Listed Contracts
Monthly contracts of recent twelve (12)
consecutive months followed by eight
(8) quarterly contracts.
Trading Hours
9:00-11:30 a.m., 1:30-3:00 p.m. (the
Beijing Time), and other trading hours
as prescribed by the Exchange
Last Trading Day
The last trading day of the month prior
to the delivery month; The Shanghai
International Energy Exchange is
entitled to adjust the last trading day in
accordance with the national holidays.
Delivery Period Five (5) consecutive trading days after
the last trading day.
Last Trading Day
The last trading day of the month prior
to the delivery month; The Shanghai
International Energy Exchange is
entitled to adjust the last trading day in
accordance with the national holidays.
Delivery Period Five (5) consecutive trading days after
the last trading day.
Grades and Quality
Specifications
Medium sour crude oil with the quality
specifications of API 32.0 degrees and
sulfur content 1.5% by weight
The deliverable grades and the price
differentials will be stipulated
separately by the Shanghai
International Energy Exchange.
Delivery Venues
Delivery Storage Facilities designated
by the Shanghai International Energy
Exchange
Minimum Trading
Margin 5% of contract value
Settlement Type Physical delivery
Product Symbol SC
Listing Exchange Shanghai International Energy
Exchange
Overnight trading runs from 9:00pm to 2:30am Shanghai time.
Characteristic of INE futures trade reporting
• Open interest – INE and SHFE use double-side count
• They actually show the changes to OI during the trading period
• Trading volume – INE and SHFE use double-side count
• Turnover - INE and SHFE use double-side count
• Price• Open
• High
• Low
• Close
• Settlement
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October 31, 2019, end-of-day report
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Average consumption for a 30-day month in China (BP Stats: 13,525 thousand bbl/d for 2018) is over 406 million barrels.
Maximum open interest for any delivery month thus far is 32 million barrels, or a maximum of 8%, while the average open interest
represented about just 5%.
By the same measure for the December 2019 NYMEX contract, the “coverage” represents 66% of average US monthly consumption.
Crude oil quality comparison
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INE NYMEX ICE
Medium Sour Light Sweet Brent Blend
API Sulfur API Sulfur API Sulfur
32.0° 1.5% 39.6° 0.24% 38.06° 0.37%
What is the nature of the price relationship?
• Current (Oct. 31, 2019) prices by contract (for December 2019 delivery)• NYMEX light sweet (WTI) -- $54.18
• ICE Brent -- $60.23
• INE -- $64.51 (452.2 RMB)
• Preliminary direction of causality estimation has the flow from NYMEX/ICE to the INE
• Note that the INE crude oil is of lower quality, yet currently priced higher.• Some had argued that an Asian exchange contract would
eliminate the so-called Asia premium
• During the life of the first contract the INE price fell between the NYMEX and ICE prices 10
Possible reasons for information flow direction
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• Character of trading• Roughly 70% of INE trading occurs during the OVERNIGHT
trading period (it has exceeded 85%), which coincides primarily with US trading hours in New York
• INE contract is on medium sour crude oil, while both ICE and NYMEX deal in light sweet crude oils• This suggests different markets, BUT ….
• Perhaps higher quality crude oils tend to lead the pricing of lower quality
Is the INE crude oil contract succeeding?
• Will the INE contract provide a better hedging instrument than either the ICE or NYMEX, even for heavier more sour crude oils?• There does not appear to have been significant growth in OI, which suggests these contracts do
NOT represent meaningful hedging instruments.
• Is there sufficient trade for price discovery and liquidity?• There is a lot of trade per OI, but …• The pattern of trading has been lumpy with virtually no activity for the Oct-18 or
Nov-18 contracts and minimal for Feb-19.
• Note that, historically, futures contracts effectively never survive if they do not satisfy hedging needs.
• Will the INE contract represent a new and distinct investment asset for speculators? Does it fit a portfolio differently…better?
• Will the crude oil contract produce sufficient revenue for the INE to justify continued offerings?• The transaction fee (charged to both sides) is 20 RMB (roughly 4% of current barrel price).• The average daily trading volume over the last two months of the August 2019 contract was
91,690 contracts traded, which implies transaction fees of 3,667,623 RMB for the day; roughly US$523,200.
• Is that enough?• Does the electronic trading nature of this and other contracts make a difference?
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Thank you!!
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I am happy to discuss and answer questions.
Ronald D. Ripple, PhD
Crude oils deliverable on the INE contract
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For the NYMEX contract, there are six (6) domestic crude oils that may be delivered against the contract (all at par), and there five (5) international crude oils that may be delivered against the contract, each with a premium or discount associated with quality differences.
