China seeks goldilocks moment in oil: how futures debuts compare

Photographer:  Stephen Shaver/Bloomberg China wants its first-ever oil futures contract to be done just right, rather than too hot or too cold.


While the world’s top crude-importing country is eager to attract liquidity into the contract that was launched March 26, the Shanghai International Energy Exchange has safeguards in place to prevent a speculative blowout that could derail its credibility as a go-to reference price for the region. Trading volume in the first week lagged two other recent commodity debuts, nickel on the Shanghai Futures Exchange in March 2015 and apples on the Zhengzhou Commodity Exchange in December.

Low Volume

Daily trading volume of the oil contract lagged recent debuts of nickel and apple contracts

Source: Bloomberg


“The government has been eager to encourage liquidity and paper trading, but of course the issue with paper trading is speculative trading that the government wants to keep at bay,” Michal Meidan, an analyst at industry consultant Energy Aspects Ltd., said last month. One of its strategies to deter excessive price swings is to set related crude storage costs in China at levels that are at least twice the rate elsewhere. Another is to implement high transaction fees and margin requirements that Goldman Sachs Group Inc. says could limit foreign interest in the contract.


Price-Weighted Volume

The value of oil contracts traded daily surpassed apple and nickel by the end of Week 1

Source: Bloomberg

Note: Value estimated by multiplying aggregate volume by front-month contract value

The size of the oil contract also helps. At 1,000 barrels per contract, the same as other international benchmarks, each oil contract’s value was about 5 times bigger than apple contracts when they began trading and 4 times the size of nickel contracts. Oil trading by value surpassed apples and nickel by the end of the first week.

Perhaps the most important measure of the contract’s performance is its open interest, an indication of how many industry players like drillers, refiners and major fuel purchasers are using it to hedge their exposure to swings in prices. Chinese commodity markets are known for having a lot of daily trading but little open interest, and the oil contract is no different.

Hedge Hogs

The value of open interest in oil contracts hasn’t kept pace with nickel’s debut

Source: Bloomberg

Note: Value estimated by multiplying aggregate open interest by front-month contract value

It did improve over the week, though, from less than 2,000 contracts after Day 1 to more than 4,000 after Day 5. Adjusted for the value of the contract, oil hedging on the exchange is growing, although not as fast as it did for nickel, and nowhere close to the levels enjoyed by crude benchmarks West Texas Intermediate in New York and Brent in London.

Sources and photo-credits: Bloomberg