Trading Places — ChAI

While eyes have been on negative oil prices in the USA, oil trading in China has also been making headlines in the form of the Shanghai International Energy Exchange (INE).

Part of the Shanghai Futures Exchange, INE launched its international crude oil contract in 2018. Progress has been slow, but trading since the start of this lunar new year has been brisk, and by the end of April is up sixfold.

Unlike other Chinese futures exchanges, it is possible for foreign investors to trade on the INE, because China wants to develop its own internationally respected benchmarks to trade alongside WTI and Brent.

It’s not just oil that China is targeting with INE. An international copper contract is anticipated, alongside other commodities important to China’s domestic economy.

To take advantage of this moment in the oil market, the INE has been rapidly expanding storage capacity. Storage doubled in April to 48 million barrels, with a further 9 million added this month. Meanwhile, connectivity is also improving, with Chicago-based systems provider Trading Technologies announcing this month that it would provide access to the market.

Sceptics point to the heavy retail focus of the market, and slow adoption by foreign institutions, reluctant, maybe, to trade a Yuan-based contract. And while negative oil prices have caused losses and regulatory scrutiny in the West, in China the market gyrations in April are rumoured to have caused losses up to $1 billion among the INE’s small investors.

As China seeks to assert itself outside its borders politically, it is inconceivable that it won’t try to increase its influence economically too.

The scale of its need for commodities means that China already plays a dominant role in the market, with each signal, be it industrial demand, port congestion or pollution, feeding its way through to price discovery on the LME Ring. In the next decade we will surely see China successfully develop usable benchmarks for use outside China.

Prices created from copper trading at the SHFE are already the basis of pricing within China, but foreign suppliers or buyers are unable to use those prices to hedge because they cannot access the exchange and cannot trade Yuan freely.

The INE begins to solve the first of these problems, but for Chinese benchmarks to truly develop, currency restrictions will need to be dismantled. If restrictions to trading on SHFE were also removed, then the copper contract would go global. For now though, the INE feels more like an experiment in internationalism that the Chinese can control, than a significant attempt to create a consequential benchmark.


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Originally published at on May 28, 2020.