Shanghai International Energy Exchange Crude Oil Futures Contract: How does it fit into the world crude oil trading system?

Transcription

1 Shanghai International Energy Exchange Crude Oil Futures Contract: How does it fit into the world crude oil trading system? 36 th USAEE/IAEE North American Conference September 23-26, 2018 Washington, DC Ronald D. Ripple, PhD Mervin Bovaird Professor of Energy Business and Finance 1

2 Outline We will examine the new Shanghai International Energy Exchange (INE) crude oil futures contract We will compare it to the contracts on the New York Mercantile Exchange (NYMEX) and the Intercontinental Exchange (ICE) We will look at trading patterns and prices 2

3 Product Contract Size Price Quotation Minimum Price Fluctuation Daily Price Limits Listed Contracts Medium Sour Crude Oil 1000 barrels per lot (RMB) Yuan per barrel (no tax or duty included in the quotation) 0.1 Yuan / barrel ±4% from the settlement price of the previous trading day Monthly contracts of recent twelve (12) consecutive months followed by eight (8) quarterly contracts. Last Trading Day Delivery Period Grades and Quality Specifications The last trading day of the month prior to the delivery month; The Shanghai International Energy Exchange is entitled to adjust the last trading day in accordance with the national holidays. Five (5) consecutive trading days after the last trading day. Medium sour crude oil with the quality specifications of API 32.0 degrees and sulfur content 1.5% by weight The deliverable grades and the price differentials will be stipulated separately by the Shanghai International Energy Exchange. Overnight trading runs from 9:00pm to 2:30am Shanghai time. Trading Hours Last Trading Day Delivery Period 9:00-11:30 a.m., 1:30-3:00 p.m. (the Beijing Time), and other trading hours as prescribed by the Exchange The last trading day of the month prior to the delivery month; The Shanghai International Energy Exchange is entitled to adjust the last trading day in accordance with the national holidays. Five (5) consecutive trading days after the last trading day. Delivery Venues Minimum Trading Margin Settlement Type Product Symbol Listing Exchange Delivery Storage Facilities designated by the Shanghai International Energy Exchange 5% of contract value Physical delivery SC Shanghai International Energy Exchange 3

4 Crude oils deliverable on the INE contract For the NYMEX contract, there are six (6) domestic crude oils that may be delivered against the contract (all at par), and there five (5) international crude oils that may be delivered against the contract, each with a premium or discount associated with quality differences. 4

5 Crude oil quality comparison INE NYMEX ICE Medium Sour Light Sweet Brent Blend API Sulfur API Sulfur API Sulfur % % % 5

6 Characteristic of INE futures trade reporting Open interest INE and SHFE use double-side count They actually show the changes to OI during the trading period Trading volume INE and SHFE use double-side count Turnover - INE and SHFE use double-side count Price Open High Low Close Settlement 6

7 May 21, 2018 end-of-day report 7

8 Accounts for 80.5% of the total trading volume reported for May 21, 2018 Note that this is over a weekend! Matches the reported volume in the previous table 8

9 Note that per the notes in the end-of-day report, we must divide each entry for Trading Volume and Open Interest by 2 to determine how many contracts actually were involved. Since the NYMEX and ICE report only the number of contracts, for comparisons across exchanges this transformation must be done. 9

10 Comparison of trading activity The INE quote for its settlement price was yuan, and it was converted at the rate of CNY/USD. 10

11 Comparison of trading activity These trading relationships are complicated by the variations in available open contracts to trade. NYMEX still has October and November contracts, while ICE has closed its October contract, and on the INE there is virtually no interest in October or November,even though they are available. 11

12 INE trading activity on the September delivery contract from March 26, 2018 (first day of trading) through August 31, 2018 (last day of trading). Note that only 601 contracts remained open and deliverable. 12

13 The existence of the INE contract does not appear to have impacted the trading pattern of the September contract on the ICE. Note that the ICE September contract ceased trading at the end of July. 13

14 The existence of the INE contract does not appear to have impacted the open interest pattern of the September contract on the ICE. Note that the ICE September contract ceased trading at the end of July. 14

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16 What is the nature of the price relationship? Relatively little data at this point to do any sophisticated analysis; there are 103 observations between April 2 nd and August 30 th. What do simple correlations tell us? We can do correlations on returns [ ln(p t ) ln(p t-1 ) ] Prices (in levels) tend to produce spurious correlations due to underlying non-stationarity, so I examine returns, which tend to be stationary. Let s look at the data for the INE September contract and the near-month contracts for NYMEX and ICE, all in US$ values, with INE in the lead and following. 16

17 September INE versus near-month returns for NYMEX and ICE contracts: Correlations This structure implies China is in the lead. This structure implies China is following. 17

18 Price (in)formation flow and its direction Basic Granger-causality testing on exchange contract returns None of the return series respond to their own lagged values during the period for which the INE September contract traded. Information appears to flow from east to west, from ICE to INE and/or from NYMEX to INE (or, perhaps, it is from higher quality oil to lower quality oil) But it does not seem to continue the easterly flow Neither ICE nor NYMEX responds to INE There appears to be a fair amount of feedback between the ICE and NYMEX, so it is difficult to draw any conclusions on direction of information flow/causality between them based on settlement prices. ICE -> INE NYMEX -> INE No flow from INE to either ICE or NYMEX, so far 18

19 Possible reasons for information flow direction Character of trading Roughly 70% - 80% of INE trading occurs during the OVERNIGHT trading period (it has exceeded 85%), which coincides primarily with US trading hours in New York INE contract is on medium sour crude oil, while both ICE and NYMEX deal in light sweet crude oils This suggests different markets The trade on the DME for September effectively ceased INE does compete directly with this contract One of the deliverables for INE is the underlying for DME Perhaps higher quality crude oils tend to lead the pricing of lower quality Perhaps it is just that the INE is new and the NYMEX and ICE are mature, well-established markets 19

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21 Does the relatively high trading volume per open interest imply heavy or excessive speculation? For the September contract, roughly seven (7) trades occurred for each contract that was open on the INE, on average. For NYMEX, for September, it was roughly 0.33 trades per open contract For ICE, for September, it was roughly 0.49 trades per open contract INE traders have no nearer maturity contracts to trade, while NYMEX and ICE did. All traders, including, and maybe especially, hedgers need to trade the contract to learn how it trades. Hedgers will tend to change position during the life of a hedge so as to maintain an optimal hedge position, so they also need to understand the degree of liquidity in the market. So, I do NOT believe we can assume that the observed Vol/OI ratio indicates (excessive) speculation. 21

22 Will the INE contract succeed? Note that futures contracts effectively never survive if they do not satisfy hedging needs. Will the INE contract represent a new and distinct investment asset for speculators? Does it fit a portfolio differently better? Will the crude oil contract produce sufficient revenue for the INE to justify continued offerings? The transaction fee (charged to both sides) is 20 RMB. The average daily trading volume over the life of the September contract was 82,408 contracts traded, which implies transaction fees of 3,296,314 RMB for the day; roughly US$504,920. Is that enough? 22

23 Will the INE contract succeed? The September contract attracted some interest, but was it enough? Will the INE contract provide a better hedging instrument than either the ICE or NYMEX, even for heavier more sour crude oils? Average consumption for a 30-day month in China (BP Stats: 12,799 thousand bbl/d for 2017) is over 380 million barrels. Maximum open interest for September represented about 22 million barrels, or a maximum of 5.6%, while the average open interest represented about 11 million barrels, or just 2.9%. So far for the December contract the maximum open interest was about 20 million barrels, which implies only about 5% of expected consumption. We will need to see growth here for the contract to represent meaningful hedging. There was/is virtually no activity for the October or November contract. The December contract needs to improve on September. 23

24 Thank you!! I am happy to discuss and answer questions. Prof. Ronald D. Ripple, PhD ron-ripple@utulsa.edu 24