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Insight from Shanghai: China's international crude contract marks first birthday
It's now a year since China took the first steps to opening up its mainly domestic futures market to the world with the launch of the Shanghai crude oil futures contract.
It was the first of three to be "internationalized" last year – the other two were the existing iron ore and PTA futures contracts. But Shanghai crude was different to those in that it was a new contract, hosted on a new trading venue – the Shanghai International Energy Exchange (INE) – and designed specifically to attract international participants.
The goal was to create a new China-based global pricing point for crude alongside incumbent international crude futures contracts NYMEX WTI and ICE Brent.
The success of a new futures contract is typically measured by its liquidity, market depth and open interest. In the case of a physically settled contract, the delivery mechanism of any new contract will also be closely scrutinized by the market.
Liquidity & market depth
While liquidity is not everything when it comes to benchmarks, when it comes to derivatives it certainly helps. In February, less than a year after it started trading, 2,116 million barrels of Shanghai Crude were traded. It took ICE Brent more than 14 years to reach a similar monthly volume.
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Liquidity on Shanghai crude is generally concentrated in just one contract. This is usually the contract that expires at the end of the current month. However, in the last 10 days before expiry liquidity moves to the next month forward as traders who are not allowed to take physical delivery are forced to liquidate their positions and roll them into the next contract.
On March 25, with just four days before the April 2019 contract expires, virtually all the volume and open interest had moved to the May 2019 contract, which expires at the end of April.