CMCRC researchers show that China is still on track to reshape the global oil market
Talk of a petroyuan replacing the petrodollar has been called “premature”, but analysis from CMCRC shows that China’s new crude oil futures contract is exceeding expectation when compared to the established US and European exchanges in key areas.
In March 2018, The Economist commented on China’s latest attempt “to count as an oil power.” This has taken the shape of new crude oil futures contract, hosted on the Shanghai International Energy Exchange (IEE), that is open to foreigners and also lets Chinese refiners and traders lock in the future price of oil in yuan.
Calling this approach “a first for commodities in China”, The Economist believes the burgeoning economic superpower’s endgame is “to create a standard for oil pricing as a rival to Brent in Europe and West Texas Intermediate in America.”
Will the approach succeed? Not according the The Economist, which concluded: “So long as China quarantines its financial system from the rest of the world, talk of a petroyuan replacing the petrodollar will be premature.”
So how is China faring three months into its “attempt”? Extremely well, say the researchers who have intimately examined the data. So well, in fact, that The Economist may need to revise its assessment.
The Economist believes the burgeoning economic superpower’s endgame is “to create a standard for oil pricing as a rival to Brent in Europe and West Texas Intermediate in America.”
What the data shows
As The Economist points out, traditional oil powers are producers rather than importers. So China is effectively trying to overturn tradition by trading on its position as the world’s biggest crude oil importer (over eight million barrels a month) – a status driven by continued industrial and population growth, and lower trade barriers in the refining sector.
All of which makes The Economist’s conclusion seem eminently logical. But…
Three months since trading began on the IEE, the picture is starting to look a little different. Volumes continue to increase and market enthusiasm remains undimmed, with Reuters reporting over 6000 newly opened trading accounts held by some 150 brokerages and international intermediaries like J.P. Morgan.
And it’s when you compare the IEE’s performance with those of the main established global exchanges for oil contracts – Chicago Mercantile Exchange (CME) and Intercontinental Exchange Europe (ICE) – that things get really interesting.
“Since this is China’s first crude oil futures market, we wanted to measure its market quality in its early stages,” said lead researcher Marc Bohmann of Australia’s Capital Markets Cooperative Research Centre. “Market quality is the term we apply to seeing how efficient and fair a market is. And the best way to do that is by comparing one market to a similar one in a different location.
“Our analysis shows that, in fact, the IEE is actually on par with the CME and ICE based on a number of key measures.”
“Our analysis shows that, in fact, the IEE is actually on par with the CME and ICE based on a number of key measures.”
China confounds expectations
To reach this conclusion, Marc Bohmann and Dr Vito Mollica, Head of the CMCRC Finance Research Centre, used the CMCRC-developed Market Quality Dashboard (MQD).
This state-of-the-art tool not only lets researchers access, integrate and accurately compare data from multiple sources, but they can also clearly visualise the results to build a near-instant – and contextual – understanding of how markets are performing.
“Our analysis indicates that trading in the new oil contract is trending upwards, which is what exchanges want with any new listing. In fact, IEE oil futures contract have overtaken trading interest in bitcoin futures, also recently launched on the CBOE and CME,” said Dr Mollica.
A key measure of market quality is price efficiency. Again, the CMCRC team has found that the IEE seems to be confounding expectations. “We measured price efficiency by comparing the variance ratio in the three exchanges, and we found that Shanghai exhibited lowest volatility in this period, and overall it has comparable price efficiency to the CME and ICE,” said Marc Bohmann.
The CMCRC team uncovered a similar story when measuring the extent to which the IEE leads or sets prices in the marketplace. Although it is slower than both the US and European exchanges when it comes to impounding new information, on average, on certain days it led ICE (64%) in terms of reflecting information.
“The data clearly shows that this has been a successful introduction. It suggests the petroyuan is a real prospect.”
“Overall, we were surprised by some of these findings,” said Dr Mollica. “The newly established Shanghai crude oil futures contracts have clearly been treated with more euphoria than those established years ago in Dubai, Tokyo and Singapore.”
“The data clearly shows that this has been a successful introduction. It suggests the petroyuan is a real prospect.”
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