Petro-Yuan Futures Launch in March: Ignore the Hype, It's a Good Thing

After a 25-year wait, China is about to trade Yuan Oil Futures. Expect to see and hear a lot of hype over this event.

In a challenge to the world’s dollar-denominated oil benchmarks Brent and West Texas Intermediate, China will list local-currency crude futures in Shanghai on March 26, according to the nation’s securities regulator. The start of trading, open to foreigners, will mark the end of years of delays and setbacks since China’s first attempt at a domestic contract in 1993.

If the futures are embraced by overseas investors and become a benchmark for global oil transactions, China’s hoping the yuan could threaten the dominance of the greenback in international trade. But skeptics say that will never happen as long as the currency is controlled by the central government, and while international traders may agree to settle contracts converted into yuan, they’ll continue to price the oil in dollars.

China surpassed the U.S. as the world’s biggest oil importer last year, buying about 8.43 million barrels a day to feed demand from government-run as well as independent refiners. The nation has also been hoarding million of barrels for its Strategic Petroleum Reserve. Rather than buying how much ever crude they want, private companies have to adhere to government-issues quotas for their purchases. And this year such allocations expanded.

The move toward creating a so-called “petro-yuan” will be a “huge story,” Adam Levinson, the founder and chief investment officer of Graticule Asset Management Asia, said in October. Besides serving as a hedging tool for Chinese companies, the contract will aid the broader government agenda of increasing the use of the yuan in trade settlement, he said.

End of the Dollar?

Don't be silly. For starters, it is meaningless what oil is priced in. It makes no difference, outside of something illiquid like Yap Island stones, what any commodity is priced in. Conversion is instantaneous.

Reserve Currency Math

It does matter where countries hold their reserves. China wants the yuan to play a bigger role in international trade. That's easy enough to achieve, at least on paper. All China has to do is run huge trade deficits and other countries will hold yuan as a mathematical necessity.

The corollary is that as long as the US runs huge trade deficits, it a mathematical necessity that the trade surplus countries accumulate dollar-denominated assets, typically US treasuries.

End of the Petro-Dollar?

Is this end of the petro-dollar in the Mideast? Actually, yes. But the Yuan has nothing to do with it.

US Petroleum Imports

Note the huge decline in OPEC imports.

US Net Imports

The above charts are from a US Energy Information Agency (EIA) Bulletin from May 8, 2017.

Let's now consider a couple of charts from the EIA Annual Energy Outlook 2018 report released on February 6, 2018.

US Net Petroleum Exporter

In all but extreme cases, the EIA expects the US to be a net exporter of energy within 3-5 years.

US Crude Production

If the US no longer runs trade deficits with the Mideast, they no longer need to accumulate US dollar reserves.

China is now the biggest importer of crude in the world. If China starts running perpetual trade deficits with OPEC countries, it makes sense for OPEC to hold Yuan reserves as long as the OPEC countries trust the yuan.

Wrong Picture

The Bloomberg article has the picture wrong. The story has nothing to do with challenging dollar benchmarks. The pricing unit is irrelevant.

Rather, the importance of OPEC on the US is waning which is a good thing!

Mike "Mish" Shedlock​

I don't buy the dollar demise via the yuan either. A bunch of chicken littles. I would assume the dollar will strengthen when we become a net oil exporter? This would of never happened if Obamanation had his way, As annoying as Trump is at least he knows energy production is good for america.

Chicken littles..hahaha.. In a few year you will realise yuan is not a chicken little but a giant even bigger than dollar..rwait and remember this when the time arrive...hahaha

The most important outcome of petro yuan is the process of dedollarisation and the start of US inablity to sanction american enemy countries at US whim. This will be a gamechanging event in geopolitics..

" Conversion is instantaneous.". BUT... the conversion RATE is not fixed. So, if you are a country like India that imports oil, it is a good idea to take one of the variables (the USD-Rupee conversion rate) off the list by holding dollars.

The other variable (fluctuation of oil price in dollars itself) is something they can live with. And even that can be mitigated by using futures.

So, it does matter what currency oil is priced in.

China is a ponzi scheme waiting to collapse. Currency manipulation etc free market capitalism is still the best path to prosperity. NOT a communist central government command control economy. When in history has that been successful.

yea, Gordon Chang has been predicting chinese economic collapse for almost 2 decades, yet it's expanding strong. meantime, they much better roads, much faster bullet train and America has these:

More than 50,000 American bridges are falling apart - NBC News

Amtrak train breaks apart in Maryland

they are the biggest creditor, we are the biggest debtor. talk about these

What free market price would the Yuan oil price be linked to? Something like 2/3 of world oil today is sold at prices linked to the market for North Sea Brent oil -- on the assumption that the Brent price represents the real market price. But the volume of Brent oil traded in arm's length transactions is a tiny percent of global production. The potential for manipulation is there. Indeed, British Petroleum of Macondo fame paid one of the largest fines ever in the UK for manipulating the Brent price. It is going to be a challenge for the Chinese to find a significant active market with multiple buyers & sellers to establish an honest price. And if the Chinese simply link their price to Brent, then the Yuan price is -- to paraphrase Mish -- a nothingburger.