Crude Oil Futures： Competing for International Pricing Power
⊙ Reporter Yan Xiaoqin
"Take the listing of crude oil futures as an opportunity to strive for the international pricing power of crude oil." People often hear such views at large and small meetings. However, the establishment of crude oil futures does not mean obtaining international pricing power. Because pricing power is determined by market position. Experts in the industry say that China crude oil futures must form an internationally recognized trading price in order to become the benchmark price right in Asia.
Chinese and foreign crude oil price war
In the global primary energy consumption structure, crude oil accounts for about 35%. As the "blood of the world industry", countries have never stopped fighting for the pricing power of crude oil.
China’s dependence on crude oil has been increasing year by year since 1990s. Around 1993, China began to become a net importer of crude oil. By 2013, China’s dependence on foreign crude oil will reach 57%.
After the reform and opening-up, the oil industry is one of the first areas that China was allowed to conduct overseas futures trading. A person from a large oil company told the reporter that domestic mainstream oil companies are widely involved in the global crude oil market, and some places also have self-operated seats for China Oil Company. For many years, the spot trading price of domestic mainstream oil companies has been floating pricing, that is, floating pricing based on Brent or WTI futures, plus a premium recognized by both parties, the spot contract has been bound to the futures contract.
The above-mentioned people told reporters that the import volume and price of mainstream crude oil enterprises are bound to the international futures market, which effectively avoids the operational risks of crude oil skyrocketing and plunging. Roughly speaking, in 2008, the price of crude oil dropped from $147/barrel to $35/barrel, and domestic crude oil imports were hedged to avoid losses of $100 billion.
However, some China enterprises are unable to enter the international market. A scholar revealed to the reporter of Shanghai Stock Exchange that when going to enterprises for investigation, some enterprises with international futures management qualifications said that they were not sure about the rules of overseas trading, lacked professionals and were afraid to participate in overseas trading.
China enterprises’ participation in overseas financial markets has been a painful lesson, and the most painful one is 2008. Look at Shennan Power first. In March 2008, Shennandian and a wholly-owned subsidiary of Goldman Sachs — — Jierun (Singapore) signed an oil price gambling agreement. The essence of this agreement is that when the international oil price is higher than $62/barrel, Shennan Power can earn a fixed income of $3 million. When the oil price falls below $62, the risk of Shennan Power Company will be multiplied.
At the time of signing the contract, the international oil price had exceeded $100 per barrel, and Shennan Power seemed to be a shoo-in. Who knows, by the end of December, the international oil price plummeted to a minimum of $31. Shennan Power Company lost nearly $83.7 million.
Fortunately, due to the disputes between the two parties over related transactions, Shennandian and Jierun Company signed a settlement agreement on November 12, 2014, and finally reached a comprehensive settlement.
"The shortcomings of China enterprises’ insufficient basic ability to participate in overseas markets were all exposed in 2008! If China has its own crude oil futures market, which can better reflect the supply and demand situation rather than the international capital game, then enterprises should get better market information and have stronger risk control capabilities! " Professor Wu Libo, executive deputy director of the Energy Economy and Strategy Research Center of Fudan University, lamented.
Since then, China has accelerated the pace of building the crude oil futures market. Wu Libo, a professor at Fudan University, revealed that in late 2008, the competent national ministries and commissions organized a multi-sectoral closed-door meeting on oil prices, which focused on international oil prices. Experts called on China to change its passive position in the international crude oil market, establish a China crude oil futures market, and form a price that reflects the relationship between supply and demand of crude oil in the region.
Wu Libo believes that if there were a crude oil futures market in China, China enterprises would not bet on OTC derivatives trading with Goldman Sachs in 2008.
Marketization determines international status.
Huang Yuncheng, an institutional researcher, believes that the main factors for the oil trading market to become a regional "pricing center" are: first, a mature spot market for crude oil; Second, the futures market has a wide range of participants, large scale and active trading; Third, the futures trading rules are transparent and the market is relatively fair. The market price formed under the above conditions comprehensively reflects the views of all parties in the market and will be widely accepted by the market.
Liu Jian, a senior researcher at Huatai Great Wall Futures, believes that the pricing power of bulk commodities comes from two factors: the strength comparison of market participants; The referential degree of the price. Only when the power of buyers and sellers is balanced can there be real market pricing. If the seller has a lot of resources and the buyer’s power is scattered, OPEC will manipulate the price of crude oil in the 1970 s and the three major mining giants will manipulate the price of iron ore before the financial crisis. If the buyer is strong, there will be a situation that China Rare Earth has no pricing power at all and is forced to accept the low price, just like before 2012.
As far as Europe and the United States are concerned, after nearly a hundred years of development, the United States and Europe have developed into the world’s first and second largest crude oil consumption regions, while crude oil production can support the spot market and developed financial futures markets. Moreover, the futures market and spot market are not artificially controlled, thus forming the global crude oil benchmark market.
The upstream and downstream of crude oil industry includes exploration, exploitation, trade, pipeline transportation, refining and processing, etc. China’s petroleum industry system has not been fully market-oriented. Exploration and exploitation are all concentrated in three central enterprises: PetroChina, Sinopec and CNOOC, as well as local state-owned Yanchang Petroleum, among which PetroChina, Sinopec and CNOOC are responsible for the development of onshore oil in the north, south and offshore respectively, and Yanchang Petroleum is responsible for the development of Shaanxi oil. These four enterprises also implement upstream and downstream integrated management, that is, covering crude oil exploitation to processing, trade and transportation. In addition, there are some private refineries in China crude oil industry.
Gao Jian, an oil analyst at Zhuo Chuang, estimates that although there are a large number of local refineries, the output accounts for up to 30% (including the local refineries under the central enterprise Sinochem Group, the real capacity of private refineries accounts for less than 15%). In the absence of crude oil exploitation rights and import rights, local refining enterprises are struggling to survive and grow in the cracks.
How to build a market with international influence in a country where crude oil spot market is still in a highly monopolized stage? How to build an international crude oil market under the background that China spot enterprises are not involved in futures? This is a difficult problem in the energy center. Attracting individual investors into the market in advance, or an active trading method.
Liu Jian, a senior researcher at Huatai Great Wall Futures, said in an interview with Shanghai Stock Exchange that China’s oil industry should break the monopoly, implement the complete free floating of gasoline and diesel prices, liberalize the right to import and export crude oil, and allow private enterprises to participate in oil exploration and exploitation. Only when the oil industry is fully competitive can China’s crude oil industry become bigger and stronger and achieve a higher international status.
From the perspective of energy security, Liu Jian believes that by introducing crude oil futures, the slow and moderate market-oriented transformation of crude oil industry can be gradually promoted by market-oriented means. In this way, it can not only improve the delivery mechanism, but also provide oil sources for refining in the crude oil futures market, which is helpful to break the upstream monopoly; It can also break the control right of monopoly enterprises on the domestic market to a certain extent; In addition, it can also provide corresponding experience and guidance for the establishment of domestic crude oil spot trade market.
The industry has expressed full confidence in crude oil futures. An authoritative person said at the fifth annual meeting of institutional investors held on November 18th that when China Financial Futures Exchange was established in 2010, some people were very worried about market activity. As a result, the trading volume of China Financial Futures Exchange has been in the forefront of the world in recent years.
An oil industry source said that at the beginning of the establishment of Dubai Commodity Exchange, trading was not active. Later, the government adopted the policy of linking pricing with futures market, and gradually squeezed out the international share. China is a big oil consumer in the world, and it has the ability to obtain regional pricing power for some oil products.