Futures Daily: Crude Oil Listing is Approaching, Expected to Function as an Umbrella for Chinese Independent Refineries

Date: May 17, 2017

By QUE Yanmei, Journalist of Futures Daily

In recent days, the long-awaited contract specifications of crude oil futures is finally unveiled, together with the other 10 rules and regulations on trading, clearing, delivery, risk management and investors’ eligibility. The release of all these business regulations marks the entry of a substantial stage for the crude oil futures.

“The listing of crude oil futures is getting closer, maybe in the 3rd quarter of this year at earliest.” Xu Jie told the reporter. He’s the General Manager and the Chief Crude Oil Analyst of Shanghai Branch of Hua’An Futures. He also said, the listing of crude oil futures is a great news to most independent refineries in China.

In recent years, along with the limits on oil import being gradually removed, more and more independent refineries are entitled to use the quota of crude oil importing. According to relevant statistics, for enterprises who have been officially approved to use crude oil importing quota (excluding those who are still in the public comment period), the accumulated amount of usable imported crude oil has reached 77.85 million tons up till now. If with those who are in the public comment period included (Yanchang, Haike, Lanqiao, Hubei Jin’ao, Shengxing, Qicheng, Hualong and Dalian Jinyuan), the aggregate amount will be 98.25 million tons.

Futures Daily was told that, in recent two years, although the oil price has been low, the volatility has maintained quite high, and it’s been very normal to see a fluctuation of 20% within just one month. “Currently, only a very few enterprises are hedging their exposures in international futures markets except, so for most of them, they‘re just passively suffering from the significantly volatile oil price.” Xu Jie said.

But he also said that, along with the listing of China’s crude oil futures, increasingly more independent refineries are expected to get involved in the futures market. According to him, the key to make money at an independent refinery, is all about increasing money efficiency and then, to produce at an as-low-as-possible oil cost.

“Refineries can buy part of the crude oil from domestic market, lock in part of their costs, and enjoy the convenience of a domestic delivery point and easy transportation. Meanwhile, they can also open new positions every month according to the market situation, to hedge the uncertainties brought by the sharp price fluctuation. ” Xu Jie told the reporter.

In his opinion, with positions in crude oil futures, the refiners can always make a profit even if the oil price goes up, as the profit in futures market can cover the increase of actual cost.

According to the hedging business head at an independent refinery in Shandong Province, currently, very few domestic independent refineries are using futures market. But as the crude oil futures is approaching, many of them are taking actions to build up their own hedging teams.“The listing of crude oil futures will provide the domestic independent refineries with tools and channels; and also, it will create opportunities for cross-market arbitrage.” He said.

Xu Jie said, besides using crude oil futures to hedge their risks, independent refineries can also register their stocks as warehouse receipts, which then can be used for warehouse receipts financing. This will greatly improve their cash efficiency and will be of great significance for those cash-heavy independent refineries companies.

“If they can make good use of crude oil futures, properly control their trading position and frequency in futures market in light of their capacity and production reality, convert their stocks into sources of financing and improve cash efficiency, the independent refineries will absolutely enhance their business performance and risk control abilities to a new height.”Xu Jie said.

W Jun, Vice Secretary of Shanghai Petroleum Products Trading Industry Association, believes that, the launch of crude oil futures is a milestone for all domestic oil and chemicals enterprises along the entire value chain. First of all, it will promote the further opening up of the crude oil market, by creating a more diversified mix of market participants, from home and abroad, individual and institutional. Along with more global investors getting involved, the competitive pattern of the spot crude oil market will also be changed gradually.

Secondly, it will push state-owned oil companies to comprehensively get involved in the futures market, promoting the pricing mechanism of domestic oil products towards a more market-oriented approach. Thirdly, it will help discover a forward price and make it easier for enterprises to predict their production cost in future and make long-term sound operation plan. Fourth, it will educate the enterprises to use hedging tools to improve their profitability and risk-bearing capabilities.

In his opinion, the key to a successful hedging strategy is the relevance between spot and futures market. “In the past, we saw enterprises did hedge their spot trade, but they were all using the international markets and prices. Once a price divergence emerged, they would have not only failed to hedge, but also suffered from unnecessary loss. ” Said Wu Jun.