Yossi Mann and Roie Yellinek
Dr. Mann is a faculty member in the Department of Middle Eastern Studies, Bar-Ilan University; Dr. Yellinek is a researcher at the Begin-Sadat Center for Strategic Studies at Bar-Ilan University and at the Middle East Institute, Washington, D.C.
As China has opened to the world, and its profile has risen greatly in recent decades, it has become an important player in the global energy market. The sharp rise in world oil consumption from the beginning of the 21st century and the oil crisis of 2014 have increased its influence. In its new role, China has established large-scale storage and refinery infrastructures and cross-border pipelines to address the challenges facing the oil industry. As its energy sector quickly develops, financial institutions and regulatory conditions have evolved, enabling trade in more complex products, such as derivatives and, especially, commodity futures.
These developments led the Shanghai Futures Exchange in March 2018 to announce the launch of a new benchmark for crude-oil-futures contracts to better reflect domestic demand. This article examines the factors behind the establishment of this benchmark and its chances of competing with the world’s leaders. It will also attempt to demonstrate how the creation of this new Chinese benchmark is influencing and shaping the political landscape and economic future of the Middle East.
SHANGAI CRUDE-OIL FUTURES
On March 26, 2018, the Shanghai International Energy Exchange launched a futures contract in crude oil that is expected to compete with the leading oil benchmarks, Brent and West Texas Intermediate (WTI). The importance of the new benchmark lies mainly in the fact that the contract will trade in the local currency rather than in US dollars, thereby increasing the international exposure of the Chinese yuan against other currencies. The new contract is expected to reflect the price of a barrel of Middle Eastern crude oil from the Persian Gulf, with a gravity of 32 API (15–45 is common) and sulfur content of 1.5 percent by weight.
Initially, the benchmark was not defined for physical delivery but as a financial contract. But only a half year later, in September 2018, it was announced that it had become a contract for physical delivery, after 601,000 barrels of oil had been stored in facilities designated by the stock exchange as official inventories. That month, it was reported that more than 30,000 accounts had been opened on the Chinese stock exchange to trade the product, with contracts ranging from 180,000 to 200,000 a day.
Encouragingly, as of September 2018, apart from the high number of contracts, the activity of foreign traders on the stock exchange gradually increased to include an estimated 15 percent of all involved traders. Another 15 percent came from categories such as local institutional investors; almost all the rest were private speculators. In March 2019, the stock exchange reported 52 registered overseas agencies—mainly from Hong Kong, Singapore, Britain, the Republic of Korea, and Japan—that were serving customers from Britain, Australia, Switzerland, Singapore, Cyprus, the Seychelles, Hong Kong and Taiwan. Five companies—Unipec, China National Petroleum Corporation (CNPC), Chinaoil, Zhenhua Oil, and Yongan Futures—were reported as actual physical companies after they had stored oil in stock-exchange facilities on behalf of local buyers.
This said, all the companies reported were local to China, controlled by the central or regional administration in one way or another. These companies purchased oil from countries that were supposed to represent the quality of oil the benchmark seeks to represent: Upper Zakum, Dubai-Oman, Qatar Marine, Yemen Masila, Iraqi Basra Light, and domestic Shengli. For example, in September 2018, CNPC purchased 100,000 barrels from Oman, and Zhenhua Oil purchased 100,000 barrels of Basra Light. Sinopec also purchased 200,000 barrels of Basra Light, which were sent to seven facilities that could store up to 19.8 million barrels each: Rizhao Base, Cezidao Reserve, Ningbodaxie Branch, Zhanjiang Branch, Sinochem-Xingzhong Aoshan Depot, Dalian PetroChina Bonded Depot, and Yangshan Depot. All are operated by PetroChina, Sinopec, Sinochem, Yanghsan Shengang, and Qingdao port.
WHY IS THIS NEEDED?
In a relatively short period of time, China has become the world’s largest oil importer. Two decades after being able, in 1992, to supply its own consumption demand, it is now a superpower, accounting for 10 percent of worldwide crude imports and 25 percent of Asian oil imports. Its high internal consumption and its status as the world’s largest importer, combined with the expectation of a significant increase in demand for petroleum products in the coming decades, prompted the government’s decision to create a benchmark traded through its local currency rather than the US dollar, now that the status of the yuan has become accepted in the international arena.
In December 2015, the International Monetary Fund officially approved the entry of the yuan into its special drawing rights basket of currencies, considered a milestone in the internationalization of the yuan. In addition, China is now using the yuan to purchase cargoes of oil from major Chinese crude importers, such as Russia, Iran, Angola, and Venezuela. This benchmark should be seen as a tool to strengthen China’s financial position at the expense of Western currencies, as well as to strengthen its neighbors in the Far East. However, most of all, it should be viewed as a tool to make the domestic currency more tradable. It is likely no coincidence that the new index was announced just weeks after the Chinese New Year and the 19th National Congress of the Communist Party, during which President Xi Jinping stressed its importance.
Asia-Pacific countries like China and South Korea had urgently requested an oil-futures market that reflected the supply-and-demand dynamics of this region. These countries declared that they would support the launch of China’s market, as the Asia-Pacific region is the world’s largest import market for crude. In 2017, China, Australia, Japan, and other Asia-Pacific countries accounted for approximately half the world total. However, Asia-Pacific countries have long suffered from significantly higher prices than those in Europe and the United States, and this has led to a sense of dissatisfaction. The roots of this phenomenon lie in the fact that the import of crude oil in the Asia-Pacific region is based on the spot price in the Middle East, while, to some extent, imports in North America and Europe are based on the price of their own crude-oil futures. Prior to this initiative, a crude-oil futures market in Asia did not exist for the risk-averse, causing importers to face greater risk exposure and forcing them to raise their premiums to cope with this. As a result, Asian importers since the late 1980s have had to pay nearly $5 billion annually to Middle Eastern exporters, seriously jeopardizing their own interests.
One of the advantages of yuan-denominated crude oil futures is to set a benchmark for crude-oil pricing in the Asia-Pacific; another is to promote the petroyuan. However, the United States and other competitors may worry that China will weaken their own dominant positions in international crude-oil pricing. The petroyuan weakens the market share of the petrodollar, shaking the dollar’s status as the world’s main reserve currency. If tension between the United States and China keeps rising, as it has since Donald Trump was elected president, China’s crude-oil futures may aggravate the conflict, especially in the areas of oil pricing and the international monetary system.
CAN IT COMPETE?
One of the major questions at hand is whether the Chinese benchmark can be an alternative to, or compete with, other international benchmarks. The need for a contract that reflects the level of trade in Asian markets in general, and in China in particular, is not a new phenomenon. In 1993, the Chinese government launched an independent crude-oil-futures contract, but it was closed shortly afterward due to unprecedented speculative activity that had the opposite effect of encouraging price hedging.
Thus, the challenge of the new Shanghai Futures Exchange will be to prove the benchmark’s ability to confront the dominance of the familiar and strong benchmarks in the Asian markets, mainly Brent, and to prevent excessive speculative activity uncorrelated with the price in the physical market. This challenge will not be easy to overcome, as was evident in March 2007, when the Dubai Mercantile Exchange (DME) established the Oman Crude Oil Futures Contract, which was supposed to better reflect the trade between Persian Gulf and Asian countries than the unquestioned indices of the crude-oil market. A decade later, it was clear that, even though the futures contract in Dubai proved itself as a measure of physical trading, it did not succeed in penetrating market-hedging bodies such as refineries, banks, and speculators. This was evident from the low total number of players, averaging 6,000 contracts per day in September 2018, while the corresponding exchanges in London (Brent) and New York (WTI) came close to half a million contracts a day. In this respect, China will face an opposite challenge: to prove that its benchmark consists not only of speculative and hedging factors but also of companies that physically trade in the product.
The fact that, since March 2018, the benchmark has risen significantly above expectations, exceeding 180,000 contracts per day after only three months, could be a sign of the new index’s future potential. However, even though the new benchmark’s early achievements are very positive, they are not enough to ensure that its growth is not due to the over-involvement of internal factors exploiting the natural volatility of crude oil, especially in such geopolitically charged years as 2018 and 2019.
These actions are being taken for speculative purposes; the price does not reflect the physical activities of international companies that are not under the influence of the Chinese government. According to the data of the Shanghai Futures Exchange, in the first week of trading, the volume of transactions was nearly 280,000; however, the number of physical positions was only 8,000. The claim that a number of physical companies are already active in the field is also worthy of limited liability, in view of the fact that all the storage and import activities are carried out by local government companies. It is, therefore, appropriate to examine the benchmark’s status using international parameters. In retrospect, the status of the international benchmark in the global oil market stems from several key factors: the market’s recognition of the benchmark, minimal government intervention, access to the physical oil on which the benchmark is based, a developed financial sector, a variety of active traders, and transparency. In the eyes of many, all these factors have made WTI and Brent the leading indices, maintaining solid standing against all alternatives, despite many challenges and frequent claims of their inability to accurately reflect prices. Therefore, the Chinese oil contract should be examined according to this scale of values, all with great caution. It is a new product, developing very rapidly in relation to its predecessors, probably due to the size of the Chinese economy and its role in the energy market, the rapid exposure of financial products worldwide due to the media, and the need for an index that better reflects the nature of crude-oil trading in Asia.
THE MARKET DETERMINES THE NEED
This is the main lesson learned from the success of the leading indices. Attempts to undermine the status of the accepted benchmarks have failed over the years; many products offered by various companies and energy agencies, such as Platt’s or Argus, failed to undermine the hegemony of the two leaders. The crude-oil market may seek to maintain stability and not undermine convention; hence, the difficulty in introducing a new benchmark. The case of the futures contract on WTI shows the market’s strength in maintaining an existing index. Despite all the obvious weaknesses of WTI in terms of location, delivery of oil and limited storage capacity, it remains unquestioned as a leading benchmark, even in the days when the position of Cushing, the main US oil-storage hub, seems to be unjustified in terms of storage capacity and even as a production area. Even when one benchmark is supposedly being strengthened at the expense of another, market forces will determine the outcome. The lack of clarity regarding Britain’s future relations with the European Union, as well as the future of the euro as a political bloc, in light of the many political and economic crises since 2008, has driven many investors from the European and British stock exchanges. This may weaken Brent as a worthwhile measure for financial investment, which may strengthen the Chinese oil-contract exposure, as Asian stock exchanges’ emergence and growth are acknowledged.
While one can claim that, until recent years, the United States has been a major importer of oil, and North Sea production has been declining, these benchmarks have a long history and other advantages that are not only related to production capacity. In fact, in the opinion of various companies dealing with crude, China should mainly focus on products that reflect the price of petroleum products associated with China, such as bitumen and fuel oil, rather than crude oil, which is not a distinctly Chinese commodity but more of an American one. In the view of China’s oil traders, however, linking Middle Eastern oil fields with domestic production can validate the strength of the benchmark, giving weight to the Shanghai Stock Exchange’s futures contract.
EXTENT OF GOVERNMENT INVOLVEMENT
In the eyes of Western analysts, the biggest threat to the new Chinese benchmark lies with those who established it: the Chinese government itself. The benchmark, which can be perceived as a coercive move, could cause investors and traders to fear that, in the future, China might intervene in setting the price by various means, such as reducing the involvement of speculators in trading.
Despite this, the significant increase in trading by various financial-sector entities, and the stock exchange’s attempt to bring in more foreign and physical companies, in particular, could overshadow the new benchmark as it accurately represents local needs, thus reducing concerns about government intervention. With good liquidity, traders may reduce transaction costs, and futures may perform better in leading price discovery. If the forward contracts lack liquidity, the industrial clients’ motivation for hedging—one of the most critical functions of crude-oil futures, together with price discovery—may be dampened.
It is indeed a challenge for China to consider how to deal properly with excessive speculative transactions. Considering the prosperity and complexity of China’s oil-futures markets, more and more regulators are involved in stabilizing the wild fluctuations of the futures’ price and limiting speculative transactions. However, to correctly evaluate the function of the futures market, it is indispensable for China to confine the power of regulators to a reasonable range, preventing an over-exclusion of speculative trading and ensuring the normal function of the market.
PHYSICAL ACCESSIBILITY
The new Chinese benchmark, in contrast to WTI or Brent, is based on a number of fields that (apart from one) are not located in or near China but in areas considered politically dangerous. For example, Basra Light suffers not only from challenges in Iraq itself but also from Iranian intervention. The oil field in Yemen is severely challenged by terrorist threats, and there is a real fear of occasional closure of the ports from which the goods are exported. On the other hand, some argue that the choice of significant fields based along important routes for oil transport, such as Yemen, alongside fields in the Arab Gulf states, reflects the real price better than any other benchmark.
The United States is the largest oil consumer in the world and has been an oil exporter for the last few years—over 3.7 million barrels in February 2020, compared to only 220,000 in December 2013, and just over 421,000 barrels in the same month in 2014. This reinforces the status of the US benchmark and shows its ability to bring in many physical and speculative players to take part in trading in the WTI. Here, too, China suffers from a major shortcoming: the inability to export. This raises the question of how China can provide a leading benchmark in the absence of an ability to reflect the supply side of the equation.
A DEVELOPED FINANCIAL SECTOR
The main critics of the US oil index, who emphasize Cushing’s irrelevance because of its lack of exposure to the hardships of international supply and demand, agree that one cannot argue with success; the volume of US contracts is very large compared to other indices. The market believes that high volume is the main measure of success. China’s unprecedented achievement, reflecting its economic strength and physical size, has been 700 percent growth in the number of contracts since trade began. By the end of August 2018, a record number of more than 350,000 traded contracts were listed on the new Chinese stock index. In this respect, within a few months, the Shanghai Stock Exchange took a significant share of the worldwide daily trade in crude oil. It should be noted that Chinese hedge funds and Asian financial players will be interested in investing in oil. This is a new and important product that can be used to increase the yields of some of the local funds that have exhausted other financial products.
STRUCTURE OF THE LOCAL MARKET
The logistics aspect of the benchmark has a significant influence on its status. First, it requires a large number of producers in order to avoid a situation that allows a limited number of players to manipulate the price. This can be met by the fact that the Chinese benchmark is based on several producers from a number of non-OPEC countries, although from the same region, as well as some within OPEC, such as Iraq. The second parameter is to ensure the operation of enough refineries in the domestic market so one company cannot hold all the products. The significant increase in recent years in the number of refineries in China is supposed to address this challenge, but in reality may be undermined by the fact that most of the refineries are owned by companies that have direct contact with the Chinese government.
The definition of crude oil is very important for price stability, and in this respect, the Shanghai Stock Exchange has clearly defined the character and quality of the benchmark, as have other countries that sought to establish the status of future oil contracts in their territories. Accordingly, China provides a remarkable response in its infrastructure for the handling of commodities and goods reaching its territory: the size of the ports, the unloading capacity and the ability to deliver goods as soon as possible from the port to the warehouses and from there to the refineries.
TRANSPARENCY
One of the main reasons WTI is considered highly tradable is the unprecedented transparency promoted by the US Department of Energy, which creates a more stable market. It is hard not to be impressed by the data published by the Energy Information Administration (EIA) and its ability to constantly supply the changing aspects of the domestic and international oil markets: reports on oil-leading train activities, the number of rigs that open at fixed intervals, field output, and, of course, the state of the oil inventory in the various stocks and their real-time advertising. These create great interest among speculative and hedge-fund investors, which significantly increases the power of the benchmark and the exposure of investors to it.
Therefore, the issue of transparency is key to China’s ability to make the benchmark both important and international. This is, by all accounts, one of China’s biggest challenges, since it is accustomed to reducing the exposure of information about local economic activity. However, because there is a desire to help move the market, a lack of accurate, available, orderly, and comprehensive information will cause investors to doubt their ability to make a profit or understand the fundamentals.
It should be noted that since the establishment of the benchmark, the Chinese have taken confidence-building measures in this regard. The stock-exchange website is welcoming and filled with monthly, weekly, and daily information. However, it cannot compare with its American and European counterparts, especially given the lack of cooperation from the Ministry of Energy, which refuses to publish accurate statistics and reports on local market activities. Despite the fact that this is a raw commodity, the report published by the stock exchange refers not to the discovery of crude oil in the country, but to tradable products by the Chinese, especially bitumen and fuel oil. Furthermore, the advertising rates that it posts are not clear enough, and players who could publish the benchmark, such as Reuters and Bloomberg, have yet to create a system that produces data and insights into the stock exchange’s reports. Of course, it should be noted that this is a stock exchange in its early stages and it can learn a lot from the steps taken by similar exchanges to compete with the leading benchmarks in the crude-oil market.
INTERNAL DISCUSSION OF A LOCAL INDEX
Some argue that the oil benchmark contributes to China’s goals as a superpower, and this dictates that China must also be a factor in shaping the global oil trade, like the United States. The decision to become an important player in the global oil market, as well as the fact that the Chinese benchmark consists of Middle Eastern fields, may have an impact on China’s interest in securing the regions that make up its benchmark. Therefore, it is not surprising that Iran and China, along with Russia, held joint naval drills in December 2019, as they did in June 2017.
This means that there may be more Chinese involvement in areas marked by violence and other challenges that might exact physical, economic, and security losses. This argument raises the question of whether it is right for China to become a prominent player in the crude-oil market, though it is not a significant producer but rather an importer. While producing countries need to protect their assets, it can be argued that importing countries should develop a network of diverse, global suppliers and not rely on one specific region. Therefore, any attempt to become a producing country will require it to change its policy in the Persian Gulf and have a presence in the wider Middle East, with all the attendant military and economic implications.
On the other hand, due to rapid industrialization and urbanization, China’s total energy consumption has increased steadily, while its domestic energy production is relatively inadequate. These facts raise concerns about its national energy-security sustainability. The concept of “energy security” was coined after the first oil crisis in the early 1970s. Energy security has a different meaning for different types of countries. As Daniel Yergin, vice chairman of IHS Markit, argues, “energy security” for consuming countries means “security of supply”—reliability and availability of energy at a reasonable price—while, for exporting counties, it means “security of demand”—sufficient access to markets and consumers to justify investment and protect their future national revenues.
In 2000, China imported around 1.4 million barrels a day (mb/d) of crude oil, less than 15 percent of the amount the United States imported that year. However, driven by its rapid economic growth and expanding refining capacity, China’s imports of crude rose to 7.6 mb/d in 2016, putting it on a par with the United States. In 2017, China surpassed this to become the world’s largest importer, with a volume of 8.4 mb/d compared to the 7.9 mb/d of the United States. In 2020, China was the world’s second-largest oil consumer (behind the United States), and its largest crude importer. Moreover, according to an International Energy Agency (IEA) forecast, China’s demand will increase by 35 percent to 15.5 mb/d by 2040, and the country’s crude-oil imports will continue to increase, reaching 11.3 mb/d by 2040. This means its import dependence will hit 80 percent, in contrast with 68 percent in 2017.
For a top energy consumer and importer such as China, energy security refers to obtaining a reliable supply for the country’s economic growth and social development. The security of supply can be further divided into three components from a narrow political perspective: reliability of import sources, security of transit routes, and affordability. Oil is China’s main worry, and safeguarding its security lies at the heart of China’s overall energy strategy. Although oil is important for China, however, in 2017 it represented about 20 percent of the country's total primary energy supply, while coal accounted for more than 60 percent.
Since the benchmark relies on the fact that half of China’s imported oil comes from the Middle East, an area that frequently experiences geopolitical upheavals, China’s energy security is arguably still vulnerable. It is overdependent on the Middle East and insecure maritime transit routes, while also sensitive to the price, due to a huge volume of foreign imports. In this context, the launch of a new Shanghai oil index serves China’s need to expand its influence over international crude pricing, particularly for oil produced in the Middle Eastern region MIDDLE EASTERN VIEW The expansion of Chinese interests in the Middle East began before the establishment of the new index, but the fact that the success of the index depends on Middle Eastern oil has led to a rise in the level of mutual interest and needs. In addition, the establishment of the new index in its current form conveys a clear message to the countries of the region: the Chinese are present, and they plan to stay and possibly even expand their presence. This message is reinforced by the fact that, in recent years, Americans have signaled in a variety of ways that they are changing their strategy toward the Middle East. For instance, President Barack Obama’s “pivot to Asia” or the traditional American concept of the zero-sum game—if China enters a region, the United States leaves—are quite different from the Chinese approach, which sees the world as a multipolar arena. Therefore, it is understandable that regional leaders have been counting on the Chinese to stay for the long term. This is strengthened in the context of oil. Investments in the industry are usually made for a long period, due to their very high expense and the considerable time necessary for building refining and other vital facilities in the field. Naturally, the responses of, and implications for, the Middle East to the establishment of the new Chinese index belong mainly to the economic-commercial spheres. Of course, these areas also influence politics.
THE POLITICAL SPHERE
In politics, the majority of effects are not direct but inherent in the fact that the expansion of Chinese interests and presence throughout the Middle East, and the departure or displacement of the United States, may change the rules of the known game. For example, the number of visits between countries, culminating with Xi’s visit to the UAE three months after the launch of the new index, highlights this direction. This visit also included the signing of a strategic cooperation agreement between the Abu Dhabi National Oil Company and the China National Offshore Oil Corporation.
Further evidence comes from the visit to the Chinese capital by Saudi Crown Prince Mohammed bin Salman about a year after the index was launched. During the visit, a deal was signed between the Saudi oil company, ARAMCO, and the Chinese government to establish a Saudi-Chinese joint venture worth more than $10 billion to develop the refinery and petrochemicals complex in the northeast of Liaoning province. These two events represent a rapprochement between the oil-rich countries and China around the energy sector and the launch of the new index. The events convey the message that China, unlike the United States, is in the region to stay: The level of visits and new agreements from the United States is on a lesser level than that of the Chinese.
Increasing the Chinese military presence in the region could be part of the Chinese message that they are more invested in the region than they have been in the past. This is due to the fact that the new index can only function if oil from the region continues to flow. As a result, any harm to this activity could be considered by China as a casus belli. This increased presence can be seen in three examples: the relatively new Chinese military base in Djibouti, joint naval drills with Russia and Iran, and increased activity into the regional arms market. All of these seem intended to convey a message of seriousness to anyone who might try to sabotage the energy flow and damage Chinese plans.
THE FINANCIAL AND ECONOMIC SPHERE
Even before the new index began operating, a memorandum of understanding was signed between the DME and the Shanghai International Energy Exchange in October 2014 in order to jointly improve their cooperation and support the establishment of the new Chinese oil index. According to the Dubai exchange’s CEO, local and Chinese officials discussed many aspects of their cooperation under the terms of this agreement, including ways to encourage the growth of crude-oil indices in the Middle East and Asia Pacific. In addition, he said, “Signing this memorandum with Shanghai International Energy Exchange is reflecting the DME’s desire to build a closer relationship with its Asian customer base.” He expected the deal to “drive the growth of standards for trade in energy contracts in Asia.” He added, “The two exchanges are located at the heart of the Middle East-Asia Pacific crude corridor, becoming more and more significant in the crude-oil trading market.”
Of course, the economic-financial response of the Middle Eastern countries, in which the above-mentioned memorandum is only one example of Chinese efforts, stems from one simple fact. Much of the new Chinese index is based on oil that originates in the Middle East and therefore affects the economy in many of the countries in the area: Saudi Arabia, the UAE, Qatar, Oman, Yemen, and Iraq. In 2018, Saudi Arabia's revenues were the highest, at $182.5 billion, accounting for more than 16 percent of total global oil and commodity sales, compared to Iraq’s 8 percent share ($91.7 billion).
The major oil centers of the Middle East—Saudi Arabia, Iraq, and Iran, among others—have to date been trading oil in the US dollar and base their economies on it. The success of the new index will be assured if and when they switch from the dollar to trading in yuan, as this would profoundly change how these economies function. It could also hit the status of the dollar very hard, significantly strengthening the yuan. By making it possible to trade oil without the need for dollars, the new indices could weaken dollar-based embargo mechanisms, strengthening countries that oppose American hegemony. The prospects for this outcome were bolstered by the return of US sanctions on Iran in 2018, following Trump's withdrawal from the nuclear agreement, by creating support for the new index and pushing Iranians to start trading oil through the yuan.
In 2016, Saudi Arabia accounted for the largest share of Chinese oil imports, estimated at about 15 percent. It was only natural for China to offer Saudi Arabia the opportunity to price oil imports in yuan, but this has not yet materialized. Nevertheless, the most affected country is probably Iran because of its closeness to China and the fact that it suffers from severe US sanctions. Some argue that “Iran will probably be the only country in the region to participate in China in this regard.” But while Iran is having trouble doing so, Russia and Angola have undertaken trade conversion to the yuan. These two countries, unlike Iran, contain the sanctions they receive. Pakistan also uses the Chinese currency widely, both in the energy economy and in domestic interfaces. However, the traditional US dollar is an extension of the new Chinese index. Another sign of its establishment is the expansion of the trading options available to Middle Eastern countries; they gain a better bargaining position, even if they choose to remain with the established trade.
CONCLUSIONS
China’s launch of the new oil benchmark is based on three factors in its favor: the country’s capability and geographic position, the selection of medium-sour crude oil, and the support of the Asia-Pacific countries. Internationally and domestically, China can launch its own crude-oil-futures contracts. First, the economic downturn has driven oil prices lower in recent years, creating a buyer’s market. Second, in 2017, China surpassed the United States to become the world’s largest crude-oil importer. In the context of low oil prices, China could boost its own oil-futures market due to its high crude-oil consumption.
It is important to note that there are some industry players who claim otherwise, that the transformation of China into a power in the oil market is presumptuous and dangerous for China’s growth. As such, this will ultimately draw it into dangerous areas, such as the Middle East. Furthermore, there are those who believe that because this is an international market, market forces should be allowed to set the tone. However, since they believe that the Chinese economy does not act in this manner, they essentially consider that any attempt to create a free benchmark will lead the Chinese government to intervene in that process.
This opposition to the Chinese benchmark does not necessarily stem from negativity but rather, as markets in general, from determination to prevent price manipulation by factors that are not physical players in the commodity and oil markets. These factors constitute a major part of financial markets and create a great deal of the liquidity of these contracts. Those who opposed launching the benchmark also mentioned that the involvement of superpowers in the Middle East has led to an increased arms race, complicating political relationships among all the oil states. They do not believe this is merely an index; its significance could be fateful to China.
Despite these factors and the large increase in trade volume so far, most deals in yuan-based contracts are reached by domestic, not foreign, players. This means China still has a long way to go before it can turn the new Chinese index into an international standard. In addition, the Shanghai Stock Exchange was launched just before the escalation of the trade dispute between the world's two largest economies—the United States and China. While this fight could hurt the traditional indices, giving way to China’s new oil benchmark, the coronavirus, which has spread worldwide from China, is another factor that may affect the quality and impact of this new index.
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13 Ibid.
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15 Ibid, no. 2–6.
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18 G. Jian,“Crude oil futures: a good beginning with some unsolved problems,” Sinopec 4 (2018) no. 74.
19 “OPEC Monthly Oil Report,” April 12, 2018, no. 4–5.
20 Tracy Liao, Edward Morse, Anthony Yuen, “China’s New Crude Oil Benchmark: Long in the Making, but Still Imperfect,” The Oxford Institute for Energy Studies 113, (May 2018): 34–37, https://www.oxfordenergy.org/wpcms/wp-content/uploads/2018/05/OEF-113.p….
20 OPEC Monthly Oil Report, no. 4–6.
21 “China’s Oil Futures Post Mysterious Gains,” World Oil, August 7, 2018, https://www.worldoil.com/news/2018/8/7/china-s-oil-futures-post-mysteri….
22 Sharnie Wong, “What to Expect From China’s Futures Market Opening Up,” Bloomberg Professional Services, July 2018, https://www.bloomberg.com/professional/blog/expect-chinas-futures-marke….
23 “Mideast Oil to Trade Through Shanghai Crude Futures Contract,” Arab News.
24 “Speculators Rattle China Oil Futures as Prices Break from World,” Bloomberg, August 7, 2018, https://www.bloomberg.com/news/articles/2018-08-07/oil-speculators-grip….
25 William Watts, “This is the Biggest Hurdle for China’s New Oil Futures Contract, OPEC Says,” Market Watch, April 12, 2018, https://www.marketwatch.com/story/opec-says-chinas-oil-futures-contract….
26 Ze-Hai, L. I. Liu, H. L. A. “Liquidity Model of Futures Contracts and Its Empirical Analysis,” Journal of Systems & Management, (2012).
27 G. Jian, “Crude Oil Futures: A Good Beginning with Some Unsolved Problems,” Sinopec, (2018). no. 4: 74.
28 “Can China Really Become a Rival to Brent and WTI?,” The National, March 27, 2018, https://www.thenational.ae/business/can-china-really-become-a-rival-to-….
29 “China Completes First Physical Delivery for Crude Futures,” Oil Price, September 2018, https://oilprice.com/Energy/Crude-Oil/China-Completes-First-Physical-De….
30 “US Exports of Crude Oil,” EIA, December 2018, https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MCREXUS1&f=M.
31 Paul Young, “Middle East Poised to Join the Ranks of Trading Hubs,” The Oxford Institute for Energy Studies 113, (May 2018): 28–35, https://www.oxfordenergy.org/wpcms/wp-content/uploads/2018/05/OEF-113.p….
32 “The Shanghai Oil Futures Contract and the Oil Demand Shock,” The Oxford Institute for Energy Studies, July 2020, https://www.oxfordenergy.org/wpcms/wp-content/uploads/2020/07/The-Shang….
33 Clara Ferreira-Marques, “Shanghai's Early Market Win Threatens Oil Duopoly,” Reuters, September 4, 2018, https://www.reuters.com/article/us-china-oil-breakingviews/breakingview….
34 “Mideast Oil to Trade Through Shanghai Crude Futures Contract,” Arab News.
35 Michael Median, “China's Crude Awakening,” The Oxford Institute for Energy Studies, 113, (May 2018): 32–33, https://www.oxfordenergy.org/wpcms/wp-content/uploads/2018/05/OEF-113.p….
36 Meng Meng, Josephine Mason, Henning Gloystein, “Shanghai Crude Futures Roar into Action as Global Merchants Dominate Trade,” Reuters, March 26, 2018, https://www.reuters.com/article/us-china-oil-futures/shanghai-crude-fut…; “Mideast oil to trade through Shanghai crude futures contract,” Arab News.
37 “Annual Energy Outlook 2018,” EIA, February 6, 2018, https://www.eia.gov/outlooks/aeo/pdf/AEO2018.pdf. Meng Meng, Josephine Mason, “Shanghai Exchange Mulls Market Makers to Boost Crude Futures Liquidity,” Reuters, August 2, 2018, https://www.reuters.com/article/us-china-oil-futures/shanghai-exchange-….
38 “China's Crude Awakening,” The Oxford Institute for Energy Studies, 31–33; Hl Thadud Aleamlat Alsiyniat Haymanat Alduwlar Ealaa Tijarat Alnft? [Is the Chinese Currency Threatening the Dollar's Dominance of Oil Trade?], Oman Info, https://omaninfo.om/topics/51/show/162632 (Arabic).
39 “Shanghai Stock Exchange,” Shanghai Stock Exchange, http://english.sse.com.cn/.
40 Ibid.
41 Tsvetana Paraskova, “The Biggest Hurdle to China’s Yuan-Priced Crude Benchmark,” Oil Price, April 15, 2018, https://oilprice.com/Energy/Crude-Oil/The-Biggest-Hurdle-To-Chinas-Yuan….
42 “Russia China, Iran Start Joint Naval Drills in Indian Ocean,” Reuters, December 27, 2019, https://www.reuters.com/article/us-iran-military-russia-china/russia-ch….
43 Ibid.
44 “Back to the Futures for Chinese Crude,” Petroleum Economist.
45 Daniel Yergin, “What Does “Energy Security” Really Mean?,” The Wall Street Journal, July 11, 2006, https://www.wsj.com/articles/SB115258420318203023.
46 “China Surpassed the United States as the World’s Largest Crude Oil Importer in 2017,” EIA, February 5, 2018, https://www.eia.gov/todayinenergy/detail.php?id=34812.
47 “World Energy Outlook 2017,” IEA, November 14, 2017, p. 579; “Director of China’s Energy Administration, China’s Crude Oil Import Dependence has Hit 68%,” Phoenix New Media, April 9, 2018, https://finance.ifeng.com/a/20180409/16063530_0.shtml.
48 “Total Primary Energy Supply (TPES) by Source, People's Republic of China 1990-2017,” IEA, https://www.iea.org/countries/china#data-browser.
49 “Alsiyn Tatahadaa Brint Walkham Al'amrikii Bieuqud Alnaft Alajilat Bialyawan,” [China Challenges Brent and US Crude Oil with Yuan Contracts], Al-Khaleej, March 27, 2018, http://www.alkhaleej.ae/economics/page/eee3c0db-b67f-4480-81bc-6c1f0235….
50 “Xi Jinping Visit: UAE, China Sign 13 Strategic Agreements,” Gulf News, July 20, 2018, https://gulfnews.com/uae/government/xi-jinping-visit-uae-china-sign-13-….
51 “Saudi Crown Prince Defends China's Right to Fight 'Terrorism',” Al-Jazeera, February 23, 2019, https://www.aljazeera.com/news/2019/02/saudi-crown-prince-defends-china….
52 J.P. Cabestan, “China’s Military Base in Djibouti: A Microcosm of China’s Growing Competition with the United States and New Bipolarity,” Journal of Contemporary China (2019), DOI: 10.1080/10670564.2019.1704994.
53 “Russia, China, Iran start joint naval drills in Indian Ocean,” Reuters.
54 “Bursat Dubay Lilttaqat Abursat Shanghhay Alduwaliat Lilttaqat Tawaqiean Mudhakirat Daem Numui Aleuqud Alajilat Lilnaft Alkhamm,” [The Dubai Energy Exchange and the Shanghai International Energy Exchange sign a memorandum to support the growth of crude oil futures contracts], Mubasher, October 20, 2014, https://bit.ly/2wRcJ2n.
55 Hasam Abdulnabi, “Shnaghhay Tutliq Eqdaan Ajlaan Lilnaft Alkham Min,” [Shanghai to Launch a Future Crude Oil Contract], Emarat Al Youm, October 21, 2014, https://www.emaratalyoum.com/business/local/2014-10-21-1.720157.
56 Yan Jiang, “Outlook on Energy Price Benchmark Market and Overview of SC Crude Oil Futures,” Shanghai International Exchange, February 27, 2019, https://www.ief.org/_resources/files/events/9th-iea-ief-opec-symposium-….
57 Daniel Workman, “Crude Oil Exports by Country, World Top Exports,” April 16, 2020, http://www.worldstopexports.com/worlds-top-oil-exports-country.
58 “Alsiyn Tutliq Bursat Aleuqud Alajilat Lilnaft Bialyawan,” [China Launches Future Oil Exchange Contract in Yuan], al-Amaltaq, March 26, 2018, http://www.alamaltaqa.com/news/details/1320.
59 “Euqubat 'Iran Almurtaqabat Tasheal Euqud Alkham fi Bursat Shanghhay,” [Iran's Upcoming Sanctions Ignite Crude Oil Contracts in the Shanghai Stock Exchange], al-Arabiya, May 14, 2018, https://bit.ly/39tKrbL.
60 Ibrahi, M.. Euqud Alsiyn Alajilat bal "Ywan" Tahul Jadid fi 'Aswaq Alnaft Alealamia, [China's Yuan Contracts are a New Shift in Global Oil Markets], Anatolia Agency, April 6, 2018, https://bit.ly/2UtHWSy.
61“Hl Thadud Aleamlat Alsiyniat Haymanat Alduwlar Ealaa Tijarat Alnft?,” [Is the Chinese Currency Threatening the Dollar's Dominance on the Oil Trade?], Oman Info.
62 Rabih Ghaffar, “Euqud Alnaft Alajilat Akhar Mughamarat Alsiyn Litadwil Eamlatiha Almahaliya,” [Future Oil Contracts are China's Latest Adventure to Internationalize its Domestic Currency], al-Yaum, February 4, 2018, https://bit.ly/2WYIjG2.
63 Xie Jun, “Shanghai Crude Futures ‘Have Long Way to Go,” The Global Times, September 3, 2018, http://www.globaltimes.cn/content/1118078.shtml.
China introduced a new oil benchmark in March 2018, part of a bid to establish its position as an economic superpower. This article analyzes the impact of this new index on the Middle East, a key region where much of the oil on which the index is based originates, by focusing on market transparency, market determination, government involvement, physical accessibility, and the inter-nal Chinese dialogue. The article then discusses the political, financial, and economic view from the Middle Eastern perspective. It finds that China still has a long way to go before it can turn the new oil benchmark into an international standard. In addition, the Shanghai Stock Exchange was launched just before the escalation of the trade dispute between the world’s two largest economies, the United States and China. While this fight could hurt the traditional indices and elevate China’s new oil benchmark, the coronavirus, which has spread worldwide from China, is another factor that may affect the quality and impact of this new index.
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