The Shanghai Oil Futures Contract and the Oil Demand Shock
The global oil demand shock due to the COVID-19 pandemic has sent markets and benchmarks into turmoil. In the height of the demand shock, WTI traded at negative values while the divergence in Middle Eastern benchmarks was laid bare. Excess supply of oil naturally gravitated to China, the biggest oil importing country in the world, increasing ‘spot’ activity in delivered barrels into the country. This, in turn, led to a flurry of activity on the Shanghai International Energy Exchange (INE) oil futures contract, which traded at a hefty premium to ICE Brent and DME Oman. As it temporarily decoupled from other regional and global benchmarks, the INE contract made several significant steps forward: Liquidity increased markedly and in response, the INE added a substantial amount of storage capacity. This allowed for increased volumes of physical deliveries and has also encouraged more established foreign traders to deliver into the INE contract. Going forward, it remains to be seen whether these high volumes of deliveries into the contract will continue, or whether the events of the past few months are merely the result of the April anomaly. As the INE contract matures and the physical infrastructure continues to develop, much will also depend on domestic reforms and whether more private Chinese refiners and traders are able to trade the contract more actively, which in part will be contingent on a further liberalization of the domestic crude buying system. At the same time, the question of the INE’s position as a regional or even global benchmark will continue to attract attention. But this Comment argues that even though the INE is still far from being a benchmark, this should not be mistaken for China’s lack of pricing power in the global oil market. Arguably, China has become increasingly active in price setting for a decade now. The COVID-19 pandemic, and the surge in Chinese buying, have further highlighted China’s importance as a global price-setter, with or without its own established crude benchmark.