The launch of China's crude oil futures is likely to be delayed, possibly until the second quarter of 2016, as authorities take a fresh look at crude grades included for delivery into the contract, while they step up efforts to ensure plentiful storage for participants, sources close to developments told Platts this week.

The grades that are currently included for delivery into the contract meant that there is too much dependence on Middle Eastern crude, the sources added. Therefore, the exchange is looking at whether there is a need to tweak the crude basket to includes grades from other regions to address concerns over security of supply.

"The risks include limited availability of storage for the futures delivery and the dependence on crude from the Middle East," a Chinese regulatory official said.

China has seen a significant build in crude stocks this year and some tanks, which have been earmarked to store crude oil for the contract's physical delivery, are currently occupied, said the official.

This view was echoed by a source from Shanghai International Energy Exchange, or INE, which is a wholly owned subsidiary of the Shanghai Futures Exchange in the Shanghai Free Trade Zone. The INE is the host for the contract.

"The exchange has to ensure enough space for any new arrivals of crude traded under the contract," said the official. But this could pose a challenge as the INE does not operate or control oil storage tanks in China.

INE had previously indicated it intends to allocate 5.35 million cu m, or 33.65 million barrels, of storage space in bonded zones along China's coastal region to store crude traded under the crude futures contract.

Out of this, INE planned to have 2.3 million cu m 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 -- all owned by state-owned oil companies and ports.

STORAGE AGREEMENTS

The INE had said in late May that it was looking to finalize agreements with these companies to dedicate storage facilities to the crude futures contract.

But no agreements have been concluded until now and some of the targeted tanks have since been filled with oil from various sources.

Another source, who oversees physical deliveries at INE, said the exchange would fix agreements for storages once the standard crude futures contract is approved.

The exchange is also looking for additional storages to ensure stable supply, the source added.

Over the first 10 months, China saw a buildup of 1.17 million b/d in crude inventory, surging 57.8% from the same period in 2014, Platts calculations based on data from the National Bureau of Statistics and the General Administration of Customs showed.

Huge inflows recently forced three crude VLCCs to remain stranded at the Qingdao port due to a ullage issues at storage facilities.

"This is the issue that raised the regulator's concerns about storage space for the contract," said the official, referring to the China Securities Regulatory Commission. SECURITY OF SUPPLY

Meanwhile, the regulator is also raising questions about the contract's heavy dependence on Middle Eastern crudes, supplies of which would be potentially threatened in the event of any geopolitical crisis, which could affect production and shipments, according to the official.

Based on the existing draft contract, the INE plans to allow physical deliveries of the following seven grades: Basrah Light, Dubai, Masila, Oman, Qatar Marine, Shengli and Upper Zakum.

Apart from domestically produced Shengli, all other grades are from the Middle East.

In response, the INE has in the last few weeks started considering the possible inclusion of other medium sour crude from Russia, Latin America and West Africa, said a source from the exchange.

These would have to be popular grades in China that can be freely traded without destination restrictions.

Over the first 10 months, Saudi Arabia was the top crude supplier to China, followed by Russia, Angola, Iraq and Oman.

Venezuela and Brazil in the seventh and ninth places, respectively, were the biggest suppliers from Latin America.

PROCEDURES

The crude futures contract has been in the works for the past several years, although the development and progress has gathered speed since 2012.

In late June, the country's top futures watchdog CSRC announced its first timing estimate for the contract, saying it would be ready in late September.

SHFE Chairman Song Anping had said they aimed to launch the contract by the end of this year.

But with some changes being planned and some issues to resolve, it is unlikely to be launched anywhere close to that target.

Lu Feng, an INE official in charge of the exchange's products and legal affairs, said last week that the exchange is yet to get an approval from CSRC for the standard contract.

After getting the approval, it will recruit members from both domestic and overseas, educate market players and then hold an official trial run for a month ahead of the launch.

The top watchdog has tightened the review procedure as they are keen to ensure that they have all regulations in place before the launch.

This is being done to avoid a crisis that they faced recently during the stock market plunge, the official said.

The Shanghai Composite Index, a key index of China's domestic stock market, collapsed by more than half in around two months from a seven-year high of around 5,178 in June as speculators took advantage of the loopholes in the share Price Index Futures.

The collapse has led to a series of investigations in CSRC, broking companies and exchanges.