30 March 2018, Beijing/Singapore — Shanghai crude oil futures fell further on Thursday and were at parity with the U.S. market, as state oil majors and local traders piled on more bearish bets amid concerns about domestic refinery demand.
The latest drop takes the fall since the contract’s launch on Monday to 10 percent, underperforming the dominant western benchmarks and raising questions that refiners in the world’s top crude importer were pushing to bring down import costs.
Benchmarks Brent and West Texas Intermediate (WTI) have fallen by around 1 percent this week.
“There is uncertainty over crude demand and delivery of the new contract,” said First Futures analyst Chen Tong. “As a result, there are not enough investors willing to take a long position or take a cargo.”
The front-month contract on the exchange is for September delivery, which creates a mismatch between Brent and WTI, which are both trading for May delivery as their front-month contracts.
The lag in expiry makes it uncertain if the falling trend for the Shanghai contract will last, but traders were surprised that Shanghai prices were on par, and even briefly below that of a major producer.
A Beijing-based trader also noted the difference in quality between the Shanghai contract, which is primarily for delivery of medium-sulfur Middle Eastern crude, versus the Brent and WTI contracts, which are for delivery of low-sulfur, so-called light crude from the U.S. or North Sea.
The trader said he is bearish about the Shanghai contract since Chinese independent refiners, or teapots, prefer not to process Middle Eastern crude because of the higher sulfur content.
He was focused the spread between Shanghai and WTI.
“Shanghai needs to be at a discount of at least $5 per barrel for us to buy,” he said.
For a second day, trading volumes were skewed to the overnight session, with more than 50,000 lots, equal to 25 million barrels of oil, changing hands in the 9 p.m. to 2:30 a.m. slot.
Total turnover in the September contract was 66,668 lots, more than each of the first two days and almost the same as Wednesday’s total.
Shanghai crude oil futures closed down 1.06 percent at 409.7 yuan ($65.16) per barrel. WTI for May is currently trading at $64.51, while the September contract is at $63.12.
Another factor that could limit demand from the teapots for the Shanghai contract is that the teapots still need to apply for crude import quotas for the second half of the year, said some China-based traders.
Furthermore, selling pressure from China’s large state-owned oil companies, who are the primary crude buyers for the country, could explain the recent decline in prices.
“China is the world’s biggest crude oil importer, so why wouldn’t they offer the market down?” said Matt Stanley, fuel broker at Freight Investor Services (FIS) in Dubai.
“If the idea of a local Chinese benchmark in local currency is to ensure China is paying ‘fair value’ for crude, then why would it be high?”
($1 = 6.2880 Chinese yuan renminbi)
*Josephine Mason & Meng Meng & Henning Gloystein – Reuters