November 26 – Weekly Oil and Gas Market Update

The Shanghai Crude Contract

The rapid adoption of the Chinese crude contract represents a significant change in global crude markets. Already representing 16% of global market share, the contract has pulled liquidity from Brent and WTI contracts and may have been a factor in the recent volatility in those markets. One of the reasons for rapid adoption was underlying product quality alignment between the contract and customer needs.

The Shanghai crude oil contract was launched in March 2018, with the critical difference being that the contract is yuan-denominated. The contract is reflective of China’s purchasing power on the world stage (China is the worlds largest crude importer at 8.4 million barrels a day) and allows China to help de-dollarize their commodity imports (as China and the US escalate their trade war, China will be increasingly incentivized to be less dependant on the US dollar). The Chinese government also hopes that the contracts will help achieve increased use of the yuan in financial markets.

The adoption of the contract has been quick with several large Chinese firms moving their futures positions into the Shanghai contract (where they were previously transacting in Brent); at the end of September, the Shanghai crude contract had 16% of global market share.

Many Chinese suppliers have often found themselves at odds with the US dollar system, or under strict sanctions, and are therefore more receptive to transacting outside the US dollar system than other suppliers might be.

Quality Driver:

Chinese refiners have been quick to adopt the Shanghai contract over Brent because the Shanghai futures contract is more representative of a medium sour crude from the Middle East (which mirrors their inputs) while Brent is typically lighter in quality.

Mark Le Dain

Mark Le Dain

Mark Le Dain currently runs strategy for Validere and previously worked as an energy investment banker. Mark has significant experience advising energy and infrastructure companies, successfully completing over $18 billion of M&A transactions and $5 billion of capital markets transactions.
Mark Le Dain