Oil briefly hits US$71, with United States supply, Middle East in focus

Oil hit US$71 (RM275) a barrel before retreating today, supported by concern about possible disruption to Middle East supply but capped by fast rising global output and a dollar recovery.

China's ultimate goal is to create a crude oil benchmark in Shanghai that can help the country wrest some pricing power away from worldwide competitors such as Intercontinental Exchange's Brent contract and the New York Mercantile Exchange's WTI. About 15,000 contracts had changed hands as of 11:30 a.m. local time.

According to Wei, this activity is especially important amid the US-Chinese row over the Trump administration's new high tariffs on Chinese imports, which is largely seen as nothing short of a trade war between Beijing and Washington.

Elsewhere, at least two Shandong independent refineries including Wonfull Petrochemical, have also participated in the morning trading session Monday, though majority of the independent companies have made a decision to stay on the sidelines on the debut trading session. The daily average is about 285,000 for March.

"If the demand for (yuan contracts) came at the expense of the USA dollar, there is always a chance, however slim, that the Chinese yuan could displace the U.S. dollar as the main petro-currency".

It wasn't a febrile start to trading, which may be exactly what the Chinese authorities intended.

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Analysts had been expecting little change after last week saw a surprise draw. The daily cost to store crude for delivery into the Shanghai exchange is set at 0.2 yuan a barrel, or at least twice the rate elsewhere, in a move seen as deterring excessive price swings. The market analysts are looking for consensus of 0.05, compared to 0.12 last month. To attract greater trade participation, Beijing plans to exempt foreign traders and organizations from income tax.

While the country hopes to establish a benchmark for global oil transactions, whether the Asian nation will achieve that goal has been the subject of hot debate. While Shanghai has gone to some lengths to open the market to global traders, very few of those players will want to find themselves at the mercy of a currency operating with a closed capital account. Such obstacles kept foreign investors away from the major stock and bond markets in the mainland.

Meanwhile, crude futures that were tested in Singapore and Japan have since faded to obscurity due to low liquidity.

"In the short-term, we believe price fluctuations will reflect domestic crude oil supply and demand".

"Whether this will have any real bearing on the other crude benchmarks, I'm not quite sure, but traders love a new toy, so I applaud China for bringing in something that could stoke up some volatility", said Matt Stanley, a fuel broker with Freight Investor Services (FIS) in Dubai.

While he is not particularly watching it closely for the moment, ANZ's Chinese desk is very focused on it, he said.

  • Ronnie Bowen