Oil prices fall as United States trade dispute with China looms

Ann Santiago
March 28, 2018

China's yuan-denominated crude oil futures have launched in Shanghai, and were up sharply in the first day of trading.

China played a significant role in the oil markets Monday, "as the looming prospect of [a] trade war with the USA weighed on oil prices", said Mihir Kapadia, chief executive officer and founder of Sun Global Investments. Its demand is already a key determinant of global oil prices. This compares with global turnover of more than $10 trillion in worldwide oil futures, the world's biggest commodity market. On the other hand, the scholar predicted that once China's futures market becomes "more mature and transparent", the Shanghai oil futures contract will emerge as a full-fledged benchmark for global oil transactions.

Last week, the API reported a surprise draw of 2.739 million barrels of United States crude oil inventories for the week ending March 16, defying analyst expectations of a build of the same amount.

September contracts of the two major dollar-based oil benchmarks, Brent in London and West Texas Intermediate (WTI) in NY, traded near $68.38 a barrel and $64.06, respectively.

The U.S. Energy Information Administration report on oil inventories is due to be released on Wednesday at 10:30a.m. EST. Brent is priced off of North Sea oil and is a primary value marker for Europe, Africa and Middle East crudes.

Overseas investors can invest in the futures contracts through various means.

The regulator "has the confidence, resolution and capability to build a sound crude oil futures market", Liu Shiyu, chairman of the China Securities Regulatory Commission said at the Shanghai Futures Exchange before trading got under way. Domestic firms, including Unipec, Chinaoil, Cnooc, and Sinochem, as well as independent refiner Shandong Huifeng Petrochemical, also joined trading, which started on the Shanghai International Energy Exchange on Monday.

Geopolitical factors have also offered support.

A surprise to many was that Glencore executed Shanghai's first crude deal.

Singapore-based brokerage Phillip Futures said that "surging production levels persist" in the US.

The hope that behind-the-scenes talks between the U.S. and China will prevent a looming trade war between the world's two biggest economies also supported global markets, including crude oil futures.

"I don't see anything extraordinarily bearish in the market today".

"This is also beneficial for us, because we are among the largest suppliers of hydrocarbons to the China market".

In Asia, crude oil is mainly priced against the Dubai, Oman and dated Brent benchmarks or Oman crude futures on the Dubai Mercantile Exchange.

Despite this, Brown said there were concerns over regulatory interference, as seen in other Chinese financial commodity markets, including iron ore and coal. Our short-term outlook and medium-term outlook on crude oil is bullish.

According to Wood Mackenzie, the impact will be felt on the pricing of crude oil from Iran and Oman, the current largest suppliers to China.

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