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Dollar oil futures contracts: The China challenge

By Sonny Atumah

In the next four weeks the global international finance system would witness adjustments as the Chinese launch its oil futures contracts in its currency, the Yuan.

The  March 26, date fixed by the Chinese authorities would signal a prop up of the Yuan, its use as global currency, and probably put an end to the entrenched practice in paying for crude oil in United States dollar.


A futures contract is a legally binding agreement to buy or sell a commodity or security at a future date at a price that is fixed at the time of the agreement. Experts explained that consumers fix prices today and use them to protect against higher prices at a later date while speculators gamble on them to determine where prices are headed.

The currency challenge is an attempt to gain a foothold and reduce the dominance of the dollar in leading crude oil benchmarks futures contracts.  The move is to offer a rival consumption of leading crude benchmarks which China as the world number one crude oil importer felt it deserves a trading tool for the already strong members of Shanghai International Energy Exchange, INE that have completed several dry runs in yuan backed oil futures contract trading.

It would also be an opportunity to commence trade futures contracts domestically. But how can Chinese authorities convince large oil producers and consumers globally to use the yuan and invest in the internationalized Shanghai benchmark?

The Brent is the global benchmark traded on the Intercontinental Exchange, ICE Futures Europe in London while the WTI is the American benchmark traded on the New York Mercantile Exchange. Will petro Yuan wrestle pricing dominance from petrodollar? The currency that oil is traded at present is the dollar. Oil price in dollars tend to move inversely to the United States currency. An appreciated dollar forces the price of oil down in the West Texas Intermediate (WTI), signaling possible down spiral.

China it was learnt tinkered with domestic crude futures in 1993, but abandoned it because of market volatility. China had its share of slowdown in its bigger stock market, the Shanghai Composite in 2015. Her Central Bank had to approve the purchase of US$19.3 billion worth of shares to stop the uncontrolled loss and plunge of the stock market.

It was reported that from March 26, Dubai crude, Oman crude, Basra light oil and China’s Shengli oil will be delivered in Yuan. Who is on each others’ jugular? Is it a post 1945 Cold War of intrigue playing out? There is a bleak situation with  world’s oil producer, Russia, whose falling Ruble is making it to lose  crude oil revenue due to both sanctions and plummeting prices, as well as rising sovereign debt yields that are Dollar denominated. Oil and gas provide Russia with about 68 percent of its exports. These are signs reminiscent of the Cold War politics emerging and we may yet see further intrigue in the global oil price war.

Bloomberg Gadfly columnist David Fickling was said to have  argued that China does not have nearly the influence in the oil market needed to carry out such a coup.  On the other hand, paying in yuan for oil could become part of President Xi Jinping’s “One Belt, One Road” initiative to develop ties across Eurasia, including the Middle East. Chinese participation in Saudi Aramco’s planned initial public offering could help sway Saudi opinion toward accepting yuan, which is used in only about 2 percent of global payments.

Is it a future foretold? In December 2012, the International Consortium of Investigative Journalists credited a report to the U.S. Intelligence community, entitled “Global Trends 2030: Alternative Worlds,” that global power in that year will be reflected by a mix of factors, including the state of technology, health, education, and governance as well as GDP (the size of the national economy), population size, and military spending.

By 2030, countries in Asia will have surpassed the United States in many of these power metrics. “There will not be any hegemonic power” in 18 years but instead a collection of “networks and coalitions” in which Asian nations and rising economic powers such as Brazil, Colombia, India, Indonesia, Nigeria, South Africa and Turkey will take part.

In the recent edition of Fortune Global Forum, McKinsey Global Institute, MGI reports that digital China is clearly leading the world accounting for about 42 percent of global commerce—more than France, Japan, the U.K. and the United States combined.

The BAT companies—Baidu, Alibaba, Tencent provide 42 percent of the venture funding in China, compared to the 5 percent provided in the U.S. by the FANG companies—Facebook, Amazon, Netflix, Google. The U.S. is far ahead of China in venture investment in areas like Artificial Intelligence, AI; big data and robotics. While China leads the world in digitization of commerce, the U.S. still leads in digitization of industry. MGI finds U.S. industry is 3.7 times more digitized than China although that gap is down substantially from 4.9 times in 2013.

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