When the long-awaited yuan-denominated oil futures launched earlier this
year, opinions were split: one camp argued with passion that the days of the
petrodollar were numbered, its demise a certainty. The other camp argued with
just as much passion the yuan has yet to catch up with the dollar as an
international currency, and the Chinese futures had basically as much of a
chance as a snowflake in Hell.
Now, six months later, opinions remain split, but now the two camps have
some facts and figures in their arsenal. For example, a figure for the
pro-petroyuan camp was the record surge in trading volume in June, to 137.5
million tons of crude for delivery in September. This translates into
137,503 lots, compared to a combined 2.6 million lots for Brent and WTI
together, though, so the yuan contract still has a way to go to catch up.
The anti-petroyuan camp, however, seems to have a bit more going for it
after six months of trade. Bloomberg cites
traders as saying that the exchange rate of the yuan coupled with storage
costs make the Chinese oil contract still a high-risk endeavor.
The yuan has been falling in recent months on the back of slowing economic
growth and the tariff spat with the United States. There is a lot of space
for surprises, however, and unpredictability is not something low-risk
traders like, so exchange rates are one thing that could put them off the
yuan contract.
Storage costs in China are another problem. They are much higher than
elsewhere: US$0.95 per barrel per month in the Shanghai International Energy
Exchange compared with US$0.05 per barrel per month at the Louisiana Offshore
Oil Port, Bloomberg reports. The reason for the higher cost is limited
storage capacity availability and the requirement that the cargo be stored at
a specific storage facility rather than at any available. Related:
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So, in light of these unpleasant facts, what does the yuan-denominated
futures contract have going for them? Well, apparently, they could make
sellers richer than if they choose to trade Middle East grades. The yuan
contract last week traded at a considerable premium to all other oil futures,
with the premium to the Middle East benchmark at US$3.35 per barrel. That
makes a profit of US$6.7 million for a cargo, according to Bloomberg
calculations—certainly not a small sum. But is it worth all the risks?
Perhaps it is and perhaps it isn’t, but it looks like it is still too
early to say. The seriousness of the risks, after all, is relative. This was
evidenced in the record-high trading interest in yuan futures in early June
that some observers, quoted by S&P Global Platts, attributed to the
heightened price volatility in the Brent and WTI benchmarks. On the other
hand, storage costs are a fixed problem that is not about to go away. It’s a
risk that traders have probably already learned to factor into their
calculations. Exchange rates are another cesspool of volatility, but
volatility is a double-edged sword. Economic data from China may still
surprise positively as it has before, despite the tariffs.
Ultimately, however, the question of whether the petrodollar will be
replaced by the petroyuan is moot. The reason for this is simple: the dollar
is the international reserve currency because most oil is traded in dollars, says
international relations professor and China expert Douglas Bulloch. It is the
international reserve currency because of the size and nature of the U.S.
economy. Therefore, the only way for China to succeed in having its currency
stand a fighting chance against the greenback is to continue opening up its
economy. Oil trading is only part of that.
By Irina Slav for Oilprice.com
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