Chinese bid to 鈥榳rest oil pricing power鈥� 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: 鈥淭his is about developing a benchmark that reflects supply and demand dynamics in the region.
鈥淏y extension you can see this as an attempt by China to wrest some pricing power away from its suppliers, although ultimately 鈥� at least in the long run 鈥� it鈥檚 the fundamentals of global crude supply and demand that will set the price.鈥�
But energy consultancy Wood Mackenzie was more forthright. It said: 鈥淲ith 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.鈥�
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鈥檚 latest step toward promoting global use of its currency. China overtook the US as the world鈥檚 largest oil importer last year, but the main oil benchmarks are determined in London and New York and priced in dollars.
WoodMac said: 鈥淭his will help the Chinese government in its efforts to internationalize the currency.鈥� 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, 鈥渢hen it鈥檒l become central to the global market, more so than WTI or Brent. 鈥淎nd that鈥檚 incentive enough for producers in the Middle East to take an interest,鈥� 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. 鈥淐hina 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.鈥�
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鈥檚 marker grades, said the consultancy.
It added: 鈥淥nce established, China鈥檚 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.鈥� 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鈥檚 penchant for occasional mar-ket interventions but also its capital controls.