China to launch crude oil futures in March

Observers in China are suggesting the impending launch of crude oil futures next month in Shanghai should help give China more clout when it comes to the overall pricing of the commodity.

The long-awaited crude oil futures contracts will begin trading on March 26th at the Shanghai International Energy Exchange, and the preparation for the launch has been ongoing for over 5 years.

The Futures will be traded in lot sizes of 1000 barrels, with the daily price fluctuations limited to plus or minus 4% from the previous settlement.

Hu Yuyue, director of Securities and Futures Research Institute at Beijing Technology and Business University, says the launch of contract futures for oil should ultimately help the Chinese currency's globalization.

"As is known to all, the main global benchmarks for major staple commodities in the world are basically priced in U.S. dollars. As such, we're making the crude oil futures yuan-denominated so that the country will be able to gain pricing power over staple commodities, which may help promote Renminbi's globalization," says Hu.

Most observers do expect that traders who purchase yuan-denominated oil contracts are most likely going to maintain a presence on the European and American markets as well.

Currently there are two benchmarks for the International oil market, West Texas Intermediate (WTI) in the U.S. and Brent in the U.K.

However, both of them are benchmarks for light crude oil trading, while most of the crude oil imported to China is medium.

As such, the new crude oil futures contracts will be based on medium crude, which should help make Shanghai a hub for international oil futures.

"If we set up a market, like Shanghai crude, and keep looking for ways to improve it, we could at least influence the global oil pricing to some extent. We may not completely gain the right to fix the prices, but our companies will be able to purchase crude oil in accordance with their demand, which is also progress," says Han Xiaoping, an energy expert at China5e.com.

The Asia-Pacific currently consumes more crude oil than the US and Europe, but the absence of a crude benchmark has forced Asian countries ultimately to pay more than Europe and America for imported oil.

Authorities contend China's crude contract will offer a hedging tool, which can better reflect market conditions in Asia than the Brent and WTI standards.

China is the world's second largest oil consumer as well as the biggest oil importer.