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Argus Media: China’s INE launches VLSFO futures

23 Jun 2020

Global energy and commodity price reporting agency Argus Media on Monday (22 June) published an analysis on the performance of China’s first VLSFO futures and the strategies adopted by each stakeholder in the VLSFO market from hedge funds to oil producers. 

Trading in China’s first very-low-sulphur fuel oil (VLSFO) contract started today, with volumes in the most-active contract exceeding 1mn t.

The front-month January 2021 contract on the International Energy Exchange (INE) opened at 2,489 yuan/t ($352/t) and closed up by 7% at RMB2,665/t or $377/t. Trading volumes in the January contract were 1.3mn t (8.4mn bl), with open interest at about 250,000t.

Argus assessed its spot VLSFO bunker price in Zhoushan at $333.70/t today.

The Shanghai-based INE list 12 monthly contracts, starting from January next year. The list price for all 12 contracts was set at RMB2,368/t. The contract is traded in 10t lots and deliveries must have viscosity of 100-380cst, maximum density of 0.991kg/m³ and maximum 0.5% sulphur content.

The decision to set the first contract expiry at more than six months away is designed to encourage more market participants to trade the new contract. Financial market participants, such as hedge funds and futures companies that mostly cannot take delivery of the underlying product, are expected to be the most active participants as a result.

The level of interest from physical market participants, including Chinese VLSFO producers, licensed bunker suppliers, bunker trading firms and shipowners, is less clear.

One bunker supplier in the major Chinese hub of Zhoushan said it is concerned that hedging on the INE would expose it to price volatility, as financial traders may bid prices to levels at a wide spread with the physical market. The company may instead use the futures contract as a marginal source of bunker supply.

Chinese shipowners — the main consumers of bunker fuel — mostly do not trade derivatives and instead buy on a fixed-price basis. And many bunker trading firms are taking a more cautious stance after banks started to tighten their credit.

Domestic refineries have the option of using the INE to hedge their sales prices. But most are state-controlled companies that are either reluctant to participate in the derivatives market, or in some cases banned from doing so by their risk-averse parent companies.

The contract launch comes after China introduced export tax rebates on VLSFO earlier this year, prompting domestic refineries to increase production and exports of the fuel.

The INE’s parent company the Shanghai Futures Exchange has listed a 380cst high-sulphur fuel oil (HSFO) futures contract since July 2018. The contract attracted turnover of 236mn lots, or 23.6bn t, in January-May this year, but only about 300,000t was delivered.

Photo credit and source:
Argus Media
Published: 23 June, 2020

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