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In 2020 Oil-Exporters’ Income Will Plunge By Over $1 Trillion, Forcing Widespread Stock Liquidations

In 2020 Oil-Exporters’ Income Will Plunge By Over $1 Trillion, Forcing Widespread Stock Liquidations

While any other time the plunge of WTI prices into negative territory last Monday would have been the story of the year, the fact that the financial press has already moved on and is focusing on whatever 100-sigma event du jour has hit, merely shows just how insane 2020 has been as a decade of central planning slowly comes unglued thanks to a black swan bat trigger that has shut down the global economy and cash flows while keeping stocks just shy of all time highs.

However, before we relegate the historic oil move that sent the May WTI future as low as -$40 on Monday to the dustbin of history, there are some critical considerations that have to be considered, namely what are the implications of much lower oil prices this year for other asset classes? To address this question we will revisit some prior analyses on the shifts in flows and incomes resulting from oil price changes, especially those looking at the consequences stemming from the collapse of petrodollar mercantilism in 2016 when oil exporting nations saw their oil-linked income crater.

By itself the decline in oil prices is generating a big shift in flows and incomes across the world, albeit – at least for now – smaller than the previous big shift seen between 2014 and 2016. According to JPMorgan calculations, oil consumers had spent around $2.2tr in 2019 on crude and related products with an average oil price of $64 per barrel, and in 2020 they are likely to spend less than half of that, i.e. around $1tr with an average oil price of $34 and an assumed big reduction in demand.

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China’s Oil Futures Contract Is Beginning to Show Its Teeth

China’s Oil Futures Contract Is Beginning to Show Its Teeth

So far so good. Petrodollar will be showing signs of wear-and-tear in the very near future.

We have been documenting the demise of the dollar hegemony for the past several years and the past two years the pace of the demise seems to be moving like a rocket. All the little details since the global financial meltdown in 2008 are now converging and one of the biggest pieces is now showing its teeth – the Chinese oil futures contract priced in yuan is growing in such a way that by the years end, at the current pace of growth, this contract will present a real challenge to the petrodollar.

China’s newly-launched crude oil futures on the Shanghai International Energy Exchange saw its trading volume surge to a record high in early June, a positive sign that a wide variety of financial market players have been keen to contribute liquidity into the new derivative market.

The trading volume for the front-month September delivery crude futures contract was recorded at 275,006 lots last Friday, the highest since it was launched on March 26, and nearly seven times the 40,656 lots seen on the first trading day, data from INE’s website showed.

This normalizes to 137,503 lots based on international practice, as INE counts each side of a trade – the buy and the sell — as two lots. One lot is equivalent to 1,000 barrels. That means around 137.5 million barrels of crude oil changed hands on paper last Friday, S&P Global Platts calculations showed.

INE crude oil futures’ trading volume has been rising steadily since the launch on March 26, with the average daily volume seen at 69,055 lots in April and 170,554 lots in May — a rise of 147% month on month. Source – Platts

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China’s Oil Futures Are Gaining Momentum

China’s Oil Futures Are Gaining Momentum


China’s new oil futures contract is gaining some momentum as a fixture on the global oil market, although hurdles remain before it can become a key benchmark for Asia.

China launched its yuan-denominated oil benchmark in March to much fanfare, after years of planning and delays. The logic of starting up an oil futures contract in China is obvious. China is the largest crude oil importer in the world, and its growing appetite for crude has increased the urgency to establish a contract based on local supply and demand conditions. Importing such heavy volumes at dollar-denominated prices exposes Chinese refiners and consumers to currency risk. A yuan contract mitigates some of that risk.

Beyond those concerns, the yuan contract also augments the global status of the Chinese currency. China is the world’s second largest economy and shifting more global trade into yuan advances Chinese influence.

However, the new contract on the Shanghai International Exchange still has to overcome some hurdles before it can be taken seriously as a premier benchmark in the global oil market. Just because the contract was launched does not mean it will become dominant, or even relevant. Previous contracts have failed to garner sufficient liquidity and ultimately have been discontinued or have wallowed in irrelevance.

The Dubai Mercantile Exchange’s Oman futures contract has been somewhat reflective of conditions in the Asian market, incorporating medium and heavy sour blends. But “its daily traded volume and open interest (number of contracts outstanding) have remained at low levels since its inception in 2007, indicating it is not actively used among market participants,” the EIA wrote last week.

As Reuters noted in early April, there are several ingredients for success. First, the contract must serve a need for hedging. Second, it has to attract enough traders in order to build liquidity. Finally, restrictions on trading, speculation, and capital controls must not be too onerous.

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The yuan-oil future and gold

The yuan-oil future and gold

“There can be little doubt that the introduction of the yuan-denominated oil future has been a major strategic step for China.”

Regular readers of Goldmoney’s research will be aware that we were among the first to alert western financial markets that China would introduce a new oil futures contract priced in yuan, months before it was officially admitted that the plans for the contract were being finalised and a date for trading was being planned.i

Trading in the new Shanghai oil future commenced last Monday, and on the first three days trading there were 151,804 contracts traded with a turnover value of 65bn yuan. It is the first futures contract listed on China’s mainland available to overseas users, putting them on the same footing as domestic investors. There are 15 benchmark contracts for different delivery dates between September next and March 2019.

There is little doubt that the Chinese government views this contract as an important development, with international commodity trading houses, such as Glencore and Trafigura, encouraged to participate. Furthermore, state-owned banks would have been on hand to ensure the necessary currency and financial liquidity is available.

The Chinese are likely to ensure trading liquidity continues to build in its new oil contracts before its oil suppliers routinely use them against physical oil deliveries. Presumably, this is one reason the first delivery date is in September, while actual shipment is never more than a month or so.

This contract goes head-to-head against the petrodollar and is the first serious challenge to it since its inception in the mid-1970s. The petrodollar was born out of the monetary chaos that led to the end of the Bretton Woods Agreement, when excess dollars in foreign hands were redeemed for gold. In that sense, being the first significant threat to the petrodollar, this contract could mark the end of a monetary era.

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Petro-Yuan Looms – How China Will Shake Up The Oil Futures Market

The “huge story”,as Graticule’s Adam Levinson called it, will, it appears, be a “wake up call” for the West that seems to happily be ignoring this potential bombshell that is China’s looming launch of domestic oil futures trading.

Additionally, Levison warns Washington that besides serving as a hedging tool for Chinese companies, the contract will aid a broader Chinese government agenda of increasing the use of the yuan in trade settlement… and thus the acceleration of de-dollarization and the rise of the Petro-Yuan.

“I don’t think there’s any doubt we’re going to see use of the renminbi in reserves go up substantially”

China has been planning this for a number of years and given rising tensions, now seems like a good time for China to flex a little.

The Shanghai International Energy Exchange, a unit of Shanghai Futures Exchange, will be known by the acronym INE and will allow Chinese buyers to lock in oil prices and pay in local currency. Also, foreign traders will be allowed to invest — a first for China’s commodities markets — because the exchange is registered in Shanghai’s free trade zone. Even  Bloomberg admits there are implications for the U.S. dollar’s well-established role as the global currency of the oil market, as Sungwoo Park sums up some of the key questions

1. When will trading begin?

According to the Shanghai-based news portal Jiemian, which cited an unidentified person from a futures company, trading is expected to start Jan. 18. Multiple rounds of testing have been carried out and all listing requirements met. The State Council, China’s cabinet, was said to have given its approval in December, one of the final regulatory hurdles. The push for oil futures gained impetus in 2017 when China surpassed the U.S. as the world’s biggest crude importer.


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Forget Draghi, Crude Matters

Forget Draghi, Crude Matters

Despite Mario Draghi’s supposedly misinterpreted comments earlier this week, there are global indications that the best of this round has already been reached. Policymakers are always going to claim things are improving, that much is given. But there is tremendous difference between that and what has occurred, especially if it is indeed rolling over worldwide.

The earliest indicators for China’s economy in June signal that the manufacturing sector may be poised to decelerate, while other challenges loom in the second half of this year.

Small- and medium-sized enterprises showed the lowest level of confidence in 16 months, a gauge of manufacturing drawn from satellite imagery slumped, and conditions in the steel business remained lackluster.

At the center of the story is as always crude oil. There are, of course, direct effects of the ups and downs (more down than up) in the energy market. As the price of it rises there will be more exploration, drilling, production, and transportation required. Some of that has already happened, and accounts for some part of this economic recuperation.

The larger effects are in sentiment, or at least the kind they might measure in PMI’s or surveys. It bears repeating that when the global downturn arrived in early 2015, economists worldwide assured everyone not to worry. They had several plausible reasons for taking that position, flawed as they were. Overall, however, especially from a US perspective the big contrary indicator was WTI.

Dismissing it as a mere “supply glut”, actual economic agents especially in industry would have known better. Even if these important marginal changes weren’t completely understood, it didn’t take any special knowledge or complex series of regressions to link the crash in oil to reduced demand for goods globally. In that way, oil became the best real-time indicator for economic demand and its overall direction no matter what Janet Yellen would say.

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The Petroyuan Cometh: Launch Of Renminbi-Denominated Oil Futures Contract Imminent

The Petroyuan Cometh: Launch Of Renminbi-Denominated Oil Futures Contract Imminent

Whenever one talks about the death of the petrodollar, the unspoken question lurking just beneath the surface is this: is the rise of the petroyuan just around the corner?

This year, we’ve gotten quite a bit of evidence to suggest that the answer to that question may indeed be a resounding “yes.” In May for instance, Russia surpassed Saudi Arabia as the largest oil supplier to China and what’s especially notable there is that beginning in 2015, Gazprom began settling all of its crude sales to China in yuan meaning that, at least partly, the petrodollar was supplanted just as soon as its death became inevitable.

Now, just as China has moved to play a greater role in determining the price of gold by participating in the LBMA auction and by establishing a yuan-denominated fix, it’s moving quickly to create a yuan-denominated oil futures contract. Here’s Reuters:

China’s push to establish a crude derivatives contract has been met with early scepticism, but oil executives say the country’s growing economic influence means a third global crude benchmark is inevitable.

A derivatives contract would give the Shanghai International Energy Exchange, known as INE, a slice of an oil futures market worth trillions of dollars, offering a rival to London’s Brent and U.S. West Texas Intermediate (WTI).

And while others have tried and failed, China brings its might as the world’s biggest oil buyer, a strong dose of political will and the alignment of its financial and banking system for a yuan-denominated contract.

“The energy industry is still manned, literally, by people from the West. But the world moves on, and there’s a change of guard,” said a senior market executive, speaking on the sidelines of a major industry gathering in Singapore this week, at which delegates spoke on condition of anonymity.

“China has become the world’s biggest oil trader, and that means that an oil price will be set there, like it or not.”

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