Crude Oil Takes Breather After Strong Rally

Posted March 28, 2018

China first planned to launch its yuan-denominated futures contracts for crude oil in 2012 when oil prices exceeded US$100 a barrel, an apparent effort to secure bargaining power to price the commodity in light of the country's increasing reliance on imported oil.

Shanghai crude oil futures opened up more than six per cent on Monday with nearly 20 million barrels of the most-active September contract changing hands.

Brent and WTI crude oil futures dipped on Monday as concerns of a looming trade dispute between the United States and China weighed on global markets.

That possibly changed on Monday, as Asia saw the launch of Shanghai crude oil futures.

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"We prefer to watch for a while", said one Weifang-based independent refiner.

The new contract reportedly attracted foreign investors including Glencore and Trafigura, as well as Freepoint Commodities, BOCI Global Commodities and North Petroleum International.

Beyond trade concerns, crude was pressured by a rise in the number of active USA oil rigs to a 3-year high of 804, implying further rises in production. "In the long run, yuan crude price will mirror the moves of Brent", he said.

With major overseas traders displaying a strong appetite to punt in China's vast derivatives market, Shanghai's turnover challenged Brent volumes during Asian hours, reflecting the potential for arbitrage trade with oil markets in the United States, Europe and Oman. The front-month Brent contract had settled Friday above $70 a barrel for the first time since late January.

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Futures for September settlement opened at 440 yuan a barrel, up from a reference price of 416 yuan.

In Asia, Shanghai crude oil futures debuted strongly in terms of volume as investors and commodity merchants bought into the world´s newest financial oil trading instrument.

The price of Brent hit $71 per barrel in the middle of January, despite surging production by the United States, which is offset by the production cuts led by the Organisation of Petroleum Exporting Countries (OPEC) and Russian Federation. U.S. Treasury Secretary Steven Mnuchin said on Fox News that he's optimistic his country can reach a truce with China on trade.

Speculative retail and institutional investors also propped up the launch-day's liquidity, said Chen Tong, Shanghai-based senior crude analyst at First Futures. By 11:14 a.m. (0314 GMT), 3,599 lots of the most-active June contract had traded, equivalent to 3.6 million barrels of crude.

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Yesterday's higher-high, lower-close chart pattern does not mean the trend is getting ready to turn lower, but it does indicate the selling is greater-than-the-buying at current price levels and that the market may be ripe for a short-term correction in order to alleviate the short-term "overbought" conditions.