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Russian oil producers can make money from China’s oil futures — experts

The Russian Urals export oil blend also has almost all characteristics required for a benchmark blend

MOSCOW, March 26. /TASS/. The Shanghai International Energy Exchange (INE) has started trading in yuan-denominated oil futures earlier today. If the instrument turns out to be a liquid one, price pegging of the Russian ESPO export blend to the China contract will favorable influence on the Russian oil blend price, experts questioned by TASS said. This will make possible for Russian oil suppliers to China to additionally earn up to $440 mln per year.

China became the world’s largest oil importer in 2017 [8 mln barrels daily] and outpaced the United States by this indicator. According to Wood Mackenzie consulting firm, China’s oil demand may grow by 2.1 mln barrels per day more by 2023. The desire of China to exert greater influence on oil pricing is clear in this regard, analysts say.

"Certainly, it is more beneficial for China to make settlements in the national currency. The national futures launch is a step in this direction. This instrument will make possible to form contracts on its basis and perform hedging," Darya Kozlova from Vygon Consulting says.

"At current import volumes, the contract grades could account for trade of about 200 billion yuan ($31.9 bln). This will help the Chinese government in its efforts to internationalize renminbi," Wood Mackenzie's research director Sushant Gupta notes.

The new futures is the first instrument making it possible for foreign investors to invest into oil in China. . The China’s Finance Ministry said earlier that nonresidents working with this instrument would be exempt from income tax payment for the period up to three years.

"However, if the government continues market interventions, while control measures over capital flow will be tightened, this will only discourage investors," expert from the Skolkovo Business School Ekaterina Grushevenko says.

"Creation of liquid futures is a lengthy and complex yet feasible process, as Dubai’s experience shows. A fairly liquid exchange market is an advantage of China, which is important for benchmark forming," Kozlova adds.

China still has to create its own oil benchmark, experts believe. Seven different blends accounting for just 15-20% of total imported volumes are currently authorized for trading. "Once established, China's reference crude prices could also act as a regional benchmark for negotiations of spot or term crude oil prices in other markets, such as Japan and South Korea," Gupta says.

Value for Russia

Started trading of the Shanghai futures is an important point for Russia, which supplied 58 mln tonnes of oil to China last year, analysts say. "Firstly, stepping down from the dollar will simplify mutual settlements. Secondly, the Russian ESPO oil blend price is currently formed with a premium to the Dubai benchmark, which is not actually supplied to markets. The transition to the differential vs. the China futures, whose price will be determined in the consumption point, will make it possible for the premium and sweet ESPO to get higher price," Kozlova says. According to her estimates, Russian companies can earn $420-440 mln from that in future, depending on the applied ratio for conversion from tonnes to barrels.

The Russian Urals export oil blend also has almost all characteristics required for a benchmark blend, Kozlova notes. "This is a steadily high volume of supplies - over 2 mln barrels are exported daily via Primorsk, Ust-Luga and the Druzhba oil pipeline alone. Furthermore, these are the volume of reserves, developed export infrastructure and sustainably high demand for the blend in Europe," the expert says.