Manifold Times | The Shanghai Futures Exchange outlines plans to develop the LSFO tied bunker futures market
The following article, published by the Manifold Times on June 30, was obtained from the Chinese domestic market through a local correspondent. An online translation service was used to create the current editorial:
The “Fuel Oil/ Low Sulfur Fuel Oil Futures Market Development Report 2022” recently released by the Shanghai Futures Exchange (SHFE) and its subsidiary Shanghai International Energy Exchange (INE) shared the highlights of the Shanghai fuel oil futures market since its inception in 2004 .
The report also included the plans for the next phase, market operations and progress updates for the country’s heating oil futures and LSFO futures:
With the strong support and active engagement of market participants, both the heating oil futures and LSFO futures markets have shown stable trading activity, smooth clearing, settlement and delivery processes, and increasing foreign participation.
(I) Increasing market size and capacity to serve the real economy
In response to the introduction of the 2020 global marine fuel sulfur cap and other industry trends, the Shanghai Futures Exchange (SHFE) has listed LSFO futures on the Shanghai International Energy Exchange (INE). Both the regular heating oil futures market and the LSFO futures market have been running smoothly since listing, with steadily increasing trading volume and open interest. Futures Industry Association (FIA) data for 2021 shows that SHFE heating oil futures and INE LSFO futures were the second and 28th largest energy derivatives in the world by trading volume, respectively.
A total of 276.9938 million lots of heating oil futures were traded in 2021, down 41.95% YoY. Year-end open interest was 493,500 lots, up 11.84% year-on-year. Monthly volume hit a yearly high of 32,697,200 lots in March and a yearly low of 12,061,700 lots in December. The highest month-end open interest of 493,500 lots was recorded in December and the lowest of 256,500 lots in October.
A total of 18.5948 million lots of LSFO futures were traded in 2021, up 90.47% year-on-year. Year-end open interest was 75,700 lots, down 46.14% year-on-year. Monthly volume hit a yearly high of 1,954,300 lots in November and a yearly low of 1,112,100 lots in February. The highest month-end open interest of 143,700 lots was recorded in January and the lowest of 62,700 lots in October.
(II) Effective pricing capabilities and expanding the international application of product pricing
Whether it is between the closing price of the most active heating oil futures contract and the spot price of 380 CST heating oil in East China, or between the closing price of the most active LSFO futures contract and the spot LSFO price in East China, the correlation coefficient is since the two futures products were listed at just under 0.9. This shows that futures markets can effectively reflect price changes in the spot market.
On June 21, 2021, the SHFE and the Zhejiang Mercantile Exchange (ZME) jointly launched the Zhoushan LSFO Bonded Bunker Price, which is calculated from the bunker quotes submitted by the major Zhoushan-based bunker fuel suppliers, with the quotes again based on the daily rate based on the settlement price of the LSFO futures contract, adjusted for premiums and discounts. At the end of 2021, five bunker fuel suppliers – Sinopec Zhejiang Zhoushan Petroleum, Chimbusco, Zhejiang Free Trade Zone PetroChina Fuel Oil, Zhejiang Seaport International Trading and Zhejiang Petroleum Fuel Oil Sales – submitted bids as bunker fuel sellers to ZME. These providers together account for 84% of the regional market, which means that their offerings can fully and objectively reflect pricing developments in the bunker market and are closely monitored by the market.
(III) Improvement of the market structure through the active participation of institutional customers
Through the end of 2021, institutional clients saw an approximately 20% year-on-year increase in trading volume and an approximately 15% increase in open interest in heating oil futures, as well as an approximately 20% and 15% year-on-year increase in trading volume and opening interest in, respectively the LSFO futures.
(IV) Stable physical delivery volume enabling effective hedging capabilities
In terms of physical delivery, the total delivery volume of SHFE fuel oil futures in 2021 is 40,935 lots (409,350 tons of fuel oil), with a total delivery value of 945 million RMB yuan. The highest delivery volume of 14,389 lots (143,890 t) was achieved in September, the lowest of 70 lots (700 t) in December. For the LSFO futures, the total delivery volume in 2021 is 41,089 lots (410,890 tons LSFO) with a total delivery value of RMB 1.340 billion yuan. Shipment volume peaked in April at 6,220 lots (62,200 tons) and bottomed out in July at 206 lots (2,060 tons).
(V) High-level opening up to high-quality development of the industry
- The first cross-border take-delivery of LSFO futures has been completed to advance the two-way opening of the China futures market
A new delivery model “domestic delivery + international delivery” has been introduced for LSFO futures, enabled by the group’s factory warehouses. The first overseas take-delivery transaction involved three Singapore companies: Trafigura Group (Singapore), Freepoint Commodities Singapore and China-Base Resource Singapore. This marks a milestone for China’s futures market in international takeover of supply activities, further improving the accessibility of China’s futures products and market connectivity under the “Belt and Road” initiative. This new delivery model expanded trading channels for industrial firms, improved resource allocation efficiency and enabled multi-dimensional risk management, covering domestic and international markets, futures and physical as well as online and offline tools. It helps the industry develop a more sophisticated pricing mechanism and improve China’s pricing power on key commodities.
- The first use of RMB price for overseas business in bunker fuel industry
Freepoint Singapore, Chimbusco International Petroleum (Singapore), China Merchants Energy Trading (Singapore) and COFCO International Freight signed bunker supply agreements that reference INE LSFO futures prices as a price benchmark. This was the first time China’s fuel oil futures prices were used as a price benchmark in overseas trades. It has increased the RMB’s influence on global fuel oil pricing, contributed valuable experience to the high-level opening up of China’s futures market, and supported China’s new development paradigm under the “dual circulation” strategy.
- Assisted in the preparation of low-sulphur bunker fuel bids to build an integrated futures market for oil and gas in the Yangtze River Delta region
SHFE and ZME jointly introduced the Zhoushan LSFO Bonded Bunker Price, which is calculated from bunker fuel suppliers’ bids based on the settlement price of the LSFO futures contract. This is the first RMB-denominated quoting mechanism in China based on futures prices and provides a new, proven and reliable way of communicating the LSFO futures price to the spot providers. This quoting mechanism was strengthened in June 2022 with the publication of bid prices by five international shipping companies for bunker fuel at anchorages in Zhoushan, creating a bid-ask quoting model.
- Futures-physical market integration to drive functional innovation for the futures market
SHFE and INE began publishing the monthly average settlement prices of LSFO futures (“Mean of Settlement” (MOS)) to complement the monthly average spot prices of the corresponding product. This futures pricing information provides companies with a more relevant pricing reference for their ongoing manufacturing and operational activities and can better meet their trading pricing and risk management needs.
Conclusion
In 2021, the futures market for heating oil was stable overall and the risks were well under control. The products have worked well as the futures and cash markets have a high correlation factor and symbiotic relationship. Important innovations were introduced in fuel oil futures prices, which made a great contribution to the two-way opening up of the China futures market and the creation of an integrated futures-physicals market of gas and oil in the Yangtze River Delta region.
The plan for the next phase of the SHFE relates to the following three areas:
- SHFE will continue to improve the way the futures market works, find new applications for futures prices – such as promoting their use among domestic refiners, traders, bunker fuel suppliers and other players in the bonded bunker fuels industry – and expand the breadth and depth of functionality of futures products.
- SHFE will accelerate the integration of futures and spot markets for LSFO by adding more price references, such as B. delivery price and ex-tank price, for China’s capped bunker fuel market; and promoting product innovation to introduce other hedging tools, such as B. LSFO Mean of Settlement Futures contracts that meet the pricing requirements of the bunker fuel supply industry.
- SHFE will continue to promote high-level and institutional market opening, strengthen cooperation with international organizations, and vigorously promote the application of “Shanghai Oil” prices in international financial markets to enhance the global influence of China’s fuel oil futures and promote the high-quality development of the real economy. We look forward to working with all market participants to build a thriving market for high and low sulfur fuel oil derivatives.
Photo credit: Dimitri Anikin on Unsplash, Shanghai Futures Exchange
Released: June 30, 2022
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