Chinese bid to ‘wrest oil pricing power’ from global suppliers

A Chinese flag in front of a refinery in Shanghai. (AFP)

LONDON: China is making an audacious bid to grab more pricing influence in the international crude market with the launch of the first yuan-denominated futures contract in Shanghai. In an interview with Arab News, Emma Richards at BMI Research said: “This is about developing a benchmark that reflects supply and demand dynamics in the region.
“By extension you can see this as an attempt by China to wrest some pricing power away from its suppliers, although ultimately — at least in the long run — it’s the fundamentals of global crude supply and demand that will set the price.”
But energy consultancy Wood Mackenzie was more forthright. It said: “With the launch of the Shanghai futures exchange, China is making its ambitions clear and is asking for its fair share in having more influence in crude oil pricing.”
The contract is the first Chinese futures product that can be traded by overseas entities without a presence in China. Analysts said the move also illustrated Beijing’s latest step toward promoting global use of its currency. China overtook the US as the world’s largest oil importer last year, but the main oil benchmarks are determined in London and New York and priced in dollars.
WoodMac said: “This will help the Chinese government in its efforts to internationalize the currency.” Seven grades of crude oil are involved in the yuan denomianted futures contracts: Basrah Light (Iraq), Oman blend (Oman), Dubai (UAE), Upper Zakum (UAE), Qatar marine (Qatar), Masila (Yemen) and Shengli (China).
Richards said if crude sold into Asia is ultimately priced off the new contract, “then it’ll become central to the global market, more so than WTI or Brent. “And that’s incentive enough for producers in the Middle East to take an interest,” she said.
WoodMac said, as a start they expected more influence on Basrah Light and Oman prices as they account for a significant portion of contract volumes. “China imports about 600,000 barrels per day of Oman crude. This is large enough to start influencing Oman prices, which are retroactively set by the Oman Ministry of Oil and Gas.”
Crude suppliers such as those from the Middle East and the US may eventually have to ensure that pricing of their crude to China remains competitive with China’s marker grades, said the consultancy.
It added: “Once established, China’s reference crude prices could also act as a regional benchmark for negotiations of spot or term crude oil prices in other markets, such as Japan and South Korea.” But whether the yuan will ever be able to compete with the dollar when it comes to oil pricing is open to question.
Bloomberg said that overseas oil producers and traders would need to swallow not just China’s penchant for occasional mar-ket interventions but also its capital controls.