China to allocate 34 million barrels of storage for 1st crude futures contract


Shanghai’s International Energy Exchange or INE intends to allocate 34 million barrels of storage space along China’s eastern coast to serve participants of the country’s proposed crude oil futures contract, officials said at the Shanghai Derivatives Market Forum Friday, when the draft of the contract was also released publicly for the first time.

Lu Feng, an INE official in charge of the exchange’s international affairs, said it is looking to finalize agreements with a number of ports and state-owned companies Sinopec and China National Petroleum Corp. to designate a total 5.35 million cubic meters of storage (33.65 million barrels) for use by participants of the futures contract.

Of this, 2.3 million cu m is expected to be made available when the contract is launched. The storage facilities are located in Zhanjiang in southern Guangdong province, Ningbo in Zhejiang, Rizhao in Shandong, Dalian in Liaoning and Shanghai.

Platts had previously reported that the contract will allow physical delivery of several grades of crude and that INE will set price differentials for the crudes against the contract’s settlement prices for physical delivery. CONTRACT LAUNCH LIKELY IN SEP AT EARLIEST

A source with INE said the contract, which will trade in the Shanghai Free Trade Zone, could now be launched in September at the earliest.

Crudes will not be co mingled in storage and there will be separate tanks in order to maintain the quality of each grade, Lu added. In addition, the crudes delivered into China must come directly from their load ports and not from storage in other locations.

Lu did not reveal the grades, saying only that they would be “popular seaborne crudes in China without destination restriction.” According to a 2013 draft of the contract seen by Platts earlier, seven crudes had been selected for delivery — Dubai, Oman, Qatar Marine, Basrah Light, Upper Zakum, Masila and Shengli.

Lu said cargoes of the same grade would be co mingled in storage, even if parameters such as density differ. This issue had recently been raised by the exchange because of quality differences in Basrah Light, with cargoes known to have varying API gravities.

The delivery will be based on “warrants,” which are called warehouse receipts in China, and these will be allowed to be swapped or used as pledge. Participants will open warehouse receipts when their barrels are stocked in delivery tanks, while the counter-party will receive the receipts when they take physical delivery of the contract crude cargoes. CONTRACT CURRENCY, TRADING HOURS

Among details released Friday were settlement currencies.

The contract is priced in Yuan, although participants will also be allowed to settle their trades in US dollars, at prevailing exchange rates, said Fan Wen Tao, an INE official for the trading and operations division. The minimum physical delivery size has been set at 200,000 barrels or 2,000 lots of 100 barrels each.

The last working day of the current month will be the final trading date for the front month contract, meaning May 29 would be the last trading day of the June contract.

Pricing for physical delivery will be calculated using the average settlement price of the last five trading days of the previous month. Trading hours for the contract are currently set for 9:00 am-11:30 am local time (0100-0330 GMT) and 1:30 pm-3:00 pm local time. Lu added that night trading starting at 9:00 pm and ending at 2:30 am will also be introduced in line with trading of other international crude futures benchmarks.

Exchange sources said the current trading hours are in line with domestic banking, derivatives and stock market trading hours.

When possible, Lu said the INE will consider extending day-time trading hours to 4:30 pm, to better align with Platts’ Market on Close assessment process in Singapore.

The INE’s crude futures contract will not trade during Chinese public holidays.

The daily price change will be capped within a 4% range of the settlement price of the previous day, even if the existing benchmark Brent or WTI fluctuates more than 4%. In the 2013 draft, the range was set at 5%.

Participants are also required to place a minimum deposit of 5% of the value of each transaction deposited with Chinese banks, down from 7% previously stipulated in the 2013 draft.

The source with INE said the deposit would be either in Yuan or US dollars. But if deposit are in US dollars, participants would need to deposit 0.5% more for exchange rate fluctuations.

Source from : Platts