• 1 hour Netflix Struggles To Rebound After Subscriber Hit
  • 23 hours $15,000 For Your Crypto’s Ticket To Visibility
  • 2 days The Next Fashion Frontier
  • 3 days What Is Africa’s Role In The New Silk Road?
  • 4 days Trump Was Right About The Dollar
  • 4 days Is Silver Gearing Up For A Rally?
  • 4 days World’s Largest Hedge Fund Turns Bullish On Gold
  • 4 days It’s Time To Spend More On Clean Energy R&D
  • 5 days Contrarian Investors Are Beating The Stock Market
  • 5 days Bulgaria’s Revenue Agency Falls Victim To Biggest Cyber Heist In History
  • 5 days Amazon Faces European Union Anti-Trust Probe
  • 5 days Commodities Are Having A Stellar Year
  • 6 days Bezos’ Next Big Project Could Be Worth $100 Billion Per Year
  • 6 days 3,600 Years Later, Climate Change Turns Mammoths Into $40M Market
  • 6 days Tesla, Apple Claim China Is Stealing Intellectual Property
  • 6 days EV Giants Duke It Out For Battery Dominance
  • 7 days Tech Billionaire Takes Aim At Google
  • 7 days Chinese Police Bust Largest Ever Illicit Crypto Mining Operation
  • 7 days Expect A Pullback Before Gold's Next Major Rally
  • 7 days Why Interest On Gold Matters
Russia Is Falling Behind In The Renewable Race

Russia Is Falling Behind In The Renewable Race

Russia, the world’s second largest…

It’s Time To Spend More On Clean Energy R&D

It’s Time To Spend More On Clean Energy R&D

Climate change is a growing…

How Much Would It Cost The U.S. To Ditch Fossil Fuels?

How Much Would It Cost The U.S. To Ditch Fossil Fuels?

Decarbonizing the U.S. grid and…

Oilprice.com

Oilprice.com

Writer, OilPrice.com

Information/Articles and Prices on a wide range of commodities: We have assembled a team of experienced writers to provide you with information on Crude Oil,…

Contact Author

  1. Home
  2. Commodities
  3. Energy

Petro-Yuan Gains Momentum, But It’s A Still Risky Endeavor

Yuan

When the long-awaited yuan-denominated oil futures launched earlier this year, opinions were split: one camp argued with passion that the days of the petrodollar were numbered, its demise a certainty. The other camp argued with just as much passion the yuan has yet to catch up with the dollar as an international currency, and the Chinese futures had basically as much of a chance as a snowflake in Hell.

Now, six months later, opinions remain split, but now the two camps have some facts and figures in their arsenal. For example, a figure for the pro-petroyuan camp was the record surge in trading volume in June, to 137.5 million tons of crude for delivery in September. This translates into 137,503 lots, compared to a combined 2.6 million lots for Brent and WTI together, though, so the yuan contract still has a way to go to catch up.

The anti-petroyuan camp, however, seems to have a bit more going for it after six months of trade. Bloomberg cites traders as saying that the exchange rate of the yuan coupled with storage costs make the Chinese oil contract still a high-risk endeavor.

The yuan has been falling in recent months on the back of slowing economic growth and the tariff spat with the United States. There is a lot of space for surprises, however, and unpredictability is not something low-risk traders like, so exchange rates are one thing that could put them off the yuan contract.

Storage costs in China are another problem. They are much higher than elsewhere: US$0.95 per barrel per month in the Shanghai International Energy Exchange compared with US$0.05 per barrel per month at the Louisiana Offshore Oil Port, Bloomberg reports. The reason for the higher cost is limited storage capacity availability and the requirement that the cargo be stored at a specific storage facility rather than at any available. Related: Police Bust China’s Largest Bitcoin Hacking Scheme

So, in light of these unpleasant facts, what does the yuan-denominated futures contract have going for them? Well, apparently, they could make sellers richer than if they choose to trade Middle East grades. The yuan contract last week traded at a considerable premium to all other oil futures, with the premium to the Middle East benchmark at US$3.35 per barrel. That makes a profit of US$6.7 million for a cargo, according to Bloomberg calculations—certainly not a small sum. But is it worth all the risks?

Perhaps it is and perhaps it isn’t, but it looks like it is still too early to say. The seriousness of the risks, after all, is relative. This was evidenced in the record-high trading interest in yuan futures in early June that some observers, quoted by S&P Global Platts, attributed to the heightened price volatility in the Brent and WTI benchmarks. On the other hand, storage costs are a fixed problem that is not about to go away. It’s a risk that traders have probably already learned to factor into their calculations. Exchange rates are another cesspool of volatility, but volatility is a double-edged sword. Economic data from China may still surprise positively as it has before, despite the tariffs.

Ultimately, however, the question of whether the petrodollar will be replaced by the petroyuan is moot. The reason for this is simple: the dollar is the international reserve currency because most oil is traded in dollars, says international relations professor and China expert Douglas Bulloch. It is the international reserve currency because of the size and nature of the U.S. economy. Therefore, the only way for China to succeed in having its currency stand a fighting chance against the greenback is to continue opening up its economy. Oil trading is only part of that.

By Irina Slav for Oilprice.com

More Top Reads From Safehaven.com

Back to homepage

Leave a comment

Leave a comment