NEWSJan 10, 2018

A Yuan-Priced Crude Futures Contract Challenges “Rules of Game” (II)

The issuance of yuan-priced crude oil futures contract will awake traders and investors who are trapped in petrodollars system. While international traders may have to weigh the potential treat of Chinese intervention or capital controls.

Strategic Significance of Yuan-Priced Crude Futures


At present, international crude oil prices are usually related to the Brent crude (BRENT) or west Texas medium crude (WTI) oil futures, which are both based on the dollar. In order to enlarge the acceptance, China uses gold as a medium, which is a great advantage compared to these two existing major oil futures benchmarks. According to previous experience, the United States will probably impose pressure on countries such as Saudi Arabia, in order to prevent them from choosing Yuan-priced crude futures. However, as is pointed out by Russian media, for most investors and oil producing countries, especially those in conflict with the United States, such as Venezuela, Iran and Russia, the linkage of oil RMB and gold will be very tempting. Therefore, some analysts believe that the launch of crude oil futures is a strategy to gain the pricing power of crude oil in the Asia Pacific region. In the long run, this act is intended to de-dollarize in the oil market and even in the whole global economy, and it is a major national strategy of internationalization of RMB, safeguarding the safety of national resources and enhancing the international status of China.

Potential Investment Risks of Yuan-Priced Crude Futures


It was recently pointed out by Wall Street journal that supervision and currency risks are the main obstacles to investors. The oil market is already one of the most volatile markets in the world, sensitive news from the Middle East may cause 3% fluctuation of oil prices overnight. Although pricing oil futures in Yuan could deal with the uncertainty of oil price caused by fluctuations in the US dollar, the problem is that China does not trust its own market and often intervene in its own foreign exchange market. Therefore, a considerable part of foreign oil producers and traders are afraid of regulatory and monetary risks.


The financial channel of American national broadcasting company (CNBC) quoted John Driscoll, the manager of Singapore JTD Energy Service Companies, said that China may have an impact on futures prices or adopt protectionist policies for domestic enterprises. The Wall Street journal predicts that large oil suppliers like Saudi Aramco will begin to choose Yuan-priced crude futures within a limited amount, which is meant to express kindness to China. Some companies hope to attract investment from China to their future IPO, but later on, they may probably continue to develop global businesses in contracts based on dollar.


In addition, pricing with RMB will promote other countries' demand for RMB, which may lead to a strong RMB exchange rate, and the upward trend of RMB will inevitably affect exports. Secondly, the settlement of RMB can be converted to gold, this will undoubtedly challenge China's gold reserves. Moreover, trading in RMB will lead to an international balance of payments deficit in China, other international oil importers need to start storing RMB in order to pay for oil costs. China should buy more oil products, but before that, China has always been a net exporter. How could China adapt to this new role?


The launch of new derivative in the current oil market will only have a modest impact to the dollar, while the dollar will gradually lose the future in the long run. Despite the risks, the advantages of this measure still outperform its disadvantages. If enough preparations have been made, this act will have a meaningful impact on the internationalization of RMB and will finally rewrite the "rules of the game" in the global currency market.
Get Desupline Insights delivered to your inbox.