Creating an Asian Benchmark for Crude Oil

  • Reference: DARDEN-F-1981-E

  • Number of pages: 11

  • Publication Date: May 10, 2021

  • Source: Darden University of Virginia (USA)

  • Type of Document: Case

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Description

On March 26, 2018, the Shanghai International Energy Exchange (INE) introduced futures trading on crude oil. The contracts were denominated in Chinese yuan (RMB) and specified that market participants make or take delivery of a thousand barrels of medium sour crude oil at contract expiration in mainland China. The INE hoped that active trading by foreign market participants would both promote greater price discovery and make the INE crude oil futures price the Asian benchmark price, or reference price, for crude oil. However, despite almost immediately attracting substantial foreign and domestic trading volume, the Shanghai INE crude oil futures price was still not the Asian benchmark price for crude oil three years after trading was introduced. Was the failure of the INE crude oil futures price to become an Asian benchmark price for crude oil due to a futures contract design issue or an INE policy issue? What steps could the INE take to improve price discovery and increase the probability that the INE crude oil futures price could become the Asian benchmark price for crude oil? Answering that question would entail reexamining the current contract design and better understanding who traded the contract, why they traded it, how they traded it, where they traded it, and when they traded it.

Keywords

Arbitrage benchmark China Commodity Pricing crack spread crude oil currency risk Derivatives forward market futures contract futures market INE International trade Oil Industry price discovery Shanghai International Energy Exchange spot market spread trading