China Shelves Plan to Launch Shanghai Crude Futures

China Shelves Plan to Launch Shanghai Crude FuturesChina Shelves Plan to Launch Shanghai Crude Futures

China's plans to create a new crude futures contract to compete with global pricing benchmarks have been shelved due to market resistance, five sources with knowledge of the matter said, dealing a blow to Shanghai's ambitions to be a leading energy trading hub.

Potential international participants were worried they would not be able to freely exchange the yuan currency given a Chinese clampdown on capital outflows, and concerned at Beijing's heavy handed intervention in its volatile commodity markets last year, the sources said, Reuters reported.

Most of the trillions of dollars of oil traded each year is priced off two crude derivatives, US West Texas Intermediate (WTI) and London's Brent, and executed mainly on the New York Mercantile Exchange owned by CME Group and Intercontinental Exchange.

With Asia becoming the world's biggest oil consuming region, China had hoped to establish its own derivative crude contract on the Shanghai International Energy Exchange (INE) that would better reflect market conditions in the region.

But after struggling to address the concerns of international players, INE has quietly dropped the plan for now, the sources told Reuters.

"This contract as originally proposed is not moving forward," said a trading manager with an oil trading firm which was initially planning to take part in the launch, speaking on condition of anonymity.

The launch of a Chinese crude futures contract, originally expected around five years ago, has been repeatedly delayed, the last time to 2015/2016, as turmoil in China's stock markets and other commodity futures raised concerns over the country's capacity to handle financial turbulence.

"Shanghai futures were probably too ambitious," said Oystein Berentsen, managing director for crude at oil trading firm Strong Petroleum in Singapore, which specializes in bringing oil into China.

Traders said various concerns contributed to the crude contract's failure. 

"The questions that were largely left unanswered were over how reliable a central government that directly or indirectly controls everything from import and export licenses to pipelines or storage facilities would be as a price benchmark," said industry veteran John Driscoll, director of consultancy JTD Energy in Singapore.

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