Shanghai crude oil futures launched on Monday with mom-and-pop and institutional investors fuelling much higher turnover than many expected for China's new commodity benchmark that is aimed at dominating the Asian market.
In a sign the contract has lured overseas interest, global commodity trader and miner Glencore, and big merchants Trafigura and Freepoint Commodities were among the first to trade, although regulatory hurdles and unfamiliar rules may stymie broader take-up in the near term.
The launch of China's yuan-denominated oil futures - its first commodity derivative to be open to foreign investors - marked the culmination of a decade-long push by the Shanghai Futures Exchange (ShFE) to give the world's largest energy consumer more power in pricing crude sold to Asia, according to Reuters.
Almost 15.4 million barrels of Shanghai's most-active September contract changed hands in the 2-1/2-hour morning session to 03.30 GMT. That initially eclipsed volumes traded in the Brent May contract, before Europe's benchmark came alive around 05.00 GMT.
But how serious is China about setting up its new Shanghai crude oil futures as a challenger to Brent and West Texas Intermediate (WTI)?
It's certainly doing some things right, Bloomberg said. A functioning commodity benchmark requires crucial infrastructure. First, you need enough suppliers to ensure individual producers can't have too much influence. A spread of producers also creates stability, preventing situations like Brent saw last year, where the failure of a single pipeline risks sending prices spiralling out of control.
Next, you need a decent array of customers. A primary reason Brent dominates, being used to price about two-thirds of the world's oil, is that almost every barrel can be shipped from its fields in the North Sea to any port in the world. WTI's delivery point in Cushing, Oklahoma is hundreds of miles from the ocean, and the US in any case banned crude oil exports for 40 years until 2015.
Away from the physical side of things, you need a well-honed market structure that allows producers, consumers and traders to hedge exposure via futures and options. To be relevant to participants in multiple countries, you also need currency hedging so that (for example) Japanese refiners don't get side-swiped by a sudden jump in the yen against the dollar.
One thing you don't seem to need, strangely, is a grade of oil that relates closely to the stuff consumers actually buy. Refiners in both China and the US Gulf Coast process mostly medium sour grades that are relatively dense and rich in sulphur compared with the sweet light crudes on which Brent and WTI are based.
That's continually cited as a problem, but touted alternatives such as Loop Sour never seem to get off the ground - not a great omen for Shanghai crude, another medium sour contract. Most market participants, it seems, would rather apply the standard sourness and gravity discounts to the most liquid benchmarks than try to set up a rival.
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What does all that mean for Shanghai crude? One positive is that the contract will be based on seven different grades, mainly from the Arabian Gulf but also including China's own Shengli.
What was a surprise to many was that Glencore - not a Chinese state oil major - executed Shanghai's first crude deal. Swiss-based commodity trader Trafigura, US-based Freepoint and independent refiner Shandong Wonfull were other early participants, Reuters said.
That went against the received wisdom that as a yuan-denominated contract, it's primarily going to be bought by China's domestic duopoly of PetroChina and China Petroleum & Chemical, or Sinopec, with a smaller trickle heading to the handful of plants operated by Cnooc and Sinochem, plus the array of independent processors known as teapot refineries.
The early involvement of big international players was a morale boost to the fledgling market.
The most-active September contract opened at 440.4 yuan ($69.78) per barrel versus a reference point of 416 yuan, jumping as high as 447.1 yuan ($70.85) in the first few minutes.
The jump came after Brent futures for May delivery opened above $70 per barrel for the first time since January on expectations Opec-leader Saudi Arabia may extend supply cuts into 2019, as well as over concern that the United States may re-introduce sanctions against Iran.
At the end of the morning session, Shanghai prices were up 3.92 per cent at 432.4 yuan, with 30,742 lots traded.
Brent and WTI, in contrast, were down by that time, weighed down by concerns over a looming US trade dispute with China.
Chinese exchanges count each side of a trade - the buy and the sell - as two lots, meaning the total oil changing hands was 15,371 lots, equal to 15.37 million barrels.
Later in trading, Unipec, the trading arm of Asia's largest refiner Sinopec, inked a deal with a western oil major to buy Middle East crude priced against the newly-launched Shanghai crude futures contract, a senior company official said on Monday.
Hong Kong-based Unipec Asia will buy the crude delivered to China for one year starting from September, said the source who declined to be named.
Shell International Eastern Trading the trading arm of Royal Dutch Shell, was heard to be the seller, said multiple sources that participate in the market, although a Shell spokeswoman declined to comment.
But it's in market infrastructure that things really fall down for Shanghai, according to Bloomberg. While Shanghai is offering 15 futures contracts with delivery dates stretching from September to March 2021, options trading - a fundamental building block of most commodities markets - is only in its infancy in China. It's barely a year since the first local commodity option, on soya meal, started trading on the Dalian exchange. That will make hedging far more difficult.
The more profound problem is currency. While Shanghai has gone to some lengths to open the market to international traders, very few of those players will want to find themselves at the mercy of a currency operating with a closed capital account.
Even if Chinese oil futures became the most liquid crude contracts in the world, they would be tied to the deeply illiquid offshore yuan. The yuan was used in just 4 per cent or so of foreign-exchange transactions in 2016, making it a less useful currency than the Australian or Canadian dollars or the Swiss franc.
As has been argued before, there's a chicken and egg issue here. Yuan-denominated oil is seen as a crucial part of internationalising the yuan as a global currency, but that goal can never really be attained while Beijing insists on maintaining current levels of control over its capital account.
Until that changes, Brent and WTI will continue to rule this roost.