CNOOC’s Shanghai crude oil futures trading attempt

At 8:30 am on March 26, China National Offshore Oil & Petrochemicals Import & Export Co., Ltd. (hereinafter referred to as CNOOC Imp. & Exp.) crude oil department office, trader Wang Junwei has sat in front of the computer to enter the “readiness state”.

In half an hour, Chinese crude oil futures will formally be listed on the Shanghai International Energy Exchange.

At 8:55, the auction starts. Wang Junwei entered a trading order to carry out the first batch of Chinese crude oil futures trading operations with medium-quality sulfur oil. Market risk control personnel are monitored in real time on site, and the company’s responsible person is followed. Everyone was around Wang Junwei, keeping an eye on the movement of the disk on the screen, holding his breath and waiting for the birth of the first single.

Before 8:59, Wang Junwei completed all operations. The trading system matches the transaction within one minute.

At 9:00, the Shanghai International Energy Trading Center opened in Mingba.

“The tense atmosphere of the entire transaction was instantly dissipated. With the purchase and sale orders of CNOOC Imp. & Exp., all transactions were completed, and CNOOC became the first company to participate in the collective bidding on the same day to reach the first batch of transactions.

Thus far, three years ago preparation and multiple simulations. In the drill, CNOOC finally successfully completed the first single transaction on the day that China’s crude oil futures went public, and the internationalization level of CNOOC’s crude oil trading business went up to a higher level.The

vanguard and the group

’s Chinese crude oil futures went from being brewing to formally landing for many years. China officially started preparatory work for the crude oil futures market.As the China Crude Oil Futures Listing Promotion Working Group and the crude oil futures standard and delivery research team members, CNOOC Import & Export has been closely monitoring the progress of the listing of crude oil futures.

In January 2015, CNOOC Import and Export Co., Ltd. It was approved to acquire non-futures member seats at the Shanghai International Energy Trading Center first and then wait for the time to mature before entering the transaction.Afterwards, CNOOC Imp. & Exp. Co., Ltd. actively prepared related work, and a crude oil futures working group composed of inter-departmental personnel was established.

Modern finance is a war that can’t see smoke. The crude oil futures market, which requires a large amount of capital investment, can be regarded as a war high ground. In the face of the newly opened battlefield of China’s crude oil futures, in addition to completing all required formalities and submitting necessary materials in accordance with the regulations, it is more important to regulate the company’s internal processes and operation plans and formulate appropriate transactions in accordance with the new game rules. Strategy to prevent risks.

For this reason, in more than three years, CNOOC Import and Export leaders led several teams to the Shanghai International Energy Trading Center and related banks to communicate with professionals; the Crude Oil Futures Working Group organized research and study several times; the company’s five positions The settlement operator passes the settlement operator certification test once.

If the crude oil futures working group is the vanguard, then there is a strong group army behind it. The relevant business units actively researched how to use Shanghai Crude Oil futures to strengthen the trade in crude oil, continuously explore opportunities for cooperation with refineries within the system and other units in the field of crude oil futures, and the risk control departments learn from the management experience of hedge-seas hedge operations before the official transaction. Combine the simulated drills to prepare for the prevention of market risks after the formal transaction; the Finance Department effectively cooperated with all kinds of expenses and capital allocations and transfers; the information post personnel introduced the Chinese crude oil futures simulation for the first time to ensure zero errors in the operation of the transaction. Trading system, actively conducting internal transaction environment testing and wiring preparation. Before the official transaction, the Crude Oil Department was the main force. Under the strong cooperation of the Risk Control Department and the Finance Department, CNOOC Import and Export participated in the systematic exercise organised by the Shanghai Futures Exchange on seven occasions to ensure that they were fully familiar with the various processes of the transaction before the official transaction. .

However, being familiar with trading rules and processes is only one aspect of entering the market. The direction, price, and quantity of transactions are also important factors that determine whether a company can profit from futures trading. According to Qi Jianyue, chief economist of the crude oil division of the CNOOC Import and Export Department, in order to formulate trading strategies and plans, the crude oil traders actively exchanged views with their counterparts such as China Oil, China United Chemical, and Sinochem Group, and carried out trade arbitrage from the use of China crude oil futures. In order to optimize the purchase and sales of crude oil in the Middle East, optimize the pricing structure of refineries, carry out inventory hedging, and use warehouse receipts to invent inventory, we have developed an initial trading plan. The company’s leadership team listened to program reports several times, conducted thematic discussions, and finally made deployments.

As Liu Junshan, deputy secretary of the CNOOC Import and Export Party Committee, put it: “Three years of grinding a sword can guarantee that the company will eventually be able to scavenge its sword on the day of listing.”

The price and reforms help boost the

listing of the “China Edition” crude oil futures, which is a milestone for the oil industry. The report of the Nineteenth Party Congress put forward “deepen the reform of the financial system and enhance the economic capabilities of financial services entities.” The landing of China’s crude oil futures can be seen as an important manifestation of this.

“Completing the first order transaction is the first shot of CNOOC in the Chinese crude oil futures market and is a key step in the Long March.” said Liu Song, chairman and party committee secretary and general manager of CNOOC Import and Export, “although CNOOC I&E has had many years of experience trading in crude oil derivatives markets overseas, but the newly emerging Chinese crude oil futures market still faces opportunities and challenges for us.

In recent years, China’s economic scale and oil demand have grown rapidly. In 2017, China imported 420 million tons of crude oil, surpassing the United States as the world’s largest importer of crude oil, and the annual increase in oil demand accounted for more than one-third of the total increase in world demand. However, the current Brent crude oil futures and WTI crude oil futures that play a leading role in the international crude oil trading system reflect the supply and demand situation in Europe and the United States, respectively, and have not yet been able to directly reflect the futures prices of crude oil supply and demand in China and the Asia Pacific region. The main purpose of China’s introduction of crude oil futures is to seek a rational new world oil trade order and enhance Asia-Pacific’s discourse power in the international oil market, so as to further protect the country’s energy security.

In the future, the international energy pricing system is likely to present a pattern of Chinese crude oil futures, Brent crude oil futures, WTI crude oil futures and Oman crude oil futures. CNOOC’s active participation in domestic crude oil futures trading is not only a concrete practice for the implementation of the national strategy, but also will be beneficial to the enhancement of CNOOC’s influence in the domestic and foreign energy market pricing system.

The development of China’s crude oil futures market, in addition to contributing to a more complete international oil trade pattern, the country also intends to use crude oil futures to force the reform of domestic price mechanism and liquidity mechanism to promote and improve China’s energy circulation system and price formation mechanism. City progress process.

The key to a successful futures variety lies in the support of the spot market, while China’s current domestic crude oil spot market has a limited participation body, crude oil trade circulation is limited, and the city and the DPRK are not at a high level. The landing of China’s crude oil futures will help improve China’s oil market system, link the spot market corrections futures markets, and give full play to the price discovery function of the futures market, so as to promote the effective allocation of resources and the long-term healthy development of the industry.

To enable more companies to participate in the spot and futures market transactions of China’s crude oil, in the second half of 2015, the National Development and Reform Commission and the Ministry of Commerce began to liberalize the use of imported crude oil and import rights for qualified local refiners. By 2017, a total of 35 local refineries had obtained qualifications for using imported crude oil, with a quota of more than 100 million tons, of which 16 had also obtained non-state trade import qualifications.

After the crude oil import right and crude oil import use rights are liberalized, more and more participants will participate in the domestic crude oil market, which is very favorable for increasing the liquidity and realizing the function of futures price discovery. At the same time, domestic channels for the import of crude oil will be more abundant, and competition will be even fiercer.

CNOOC, as an important domestic crude oil supplier, should make full use of domestic futures tools, actively participate in domestic and foreign market competition, and lay a foundation for the company in the future market competition pattern.

While actively seizing opportunities, CNOOC Import and Export Participation in China’s crude oil futures trading also faces challenges and risks brought about by subjective and objective factors.

First of all, due to the design of futures contracts subject to the import crude oil policy, and crude oil futures have a high financial threshold, many potential traders are still waiting to see. Participants in futures trading need assets such as asset management companies, industrial oil companies, oil consumer customers, and oil trading companies. They need assets hedging, physical goods, cargo arbitrage, and hedging purposes. They also need assets. Investments, Participants who solely use futures speculative arbitrage for trading purposes. If the lack of high liquidity market participation will affect the survival and development of the contract.

Second, in the event of uncertain trading liquidity, the price fluctuation of the futures contract is likely to deviate from the true value of the underlying crude oil, which will make the contract unable to realize the basic function of price discovery. For oil companies, their applicability will also be greatly reduced, even leading to a large basis risk in hedging applications.

Third, in terms of resource acquisition, because the current deliverable physical goods include a large number of quality crude oils, the price difference between different quality crude oils is a fixed premium. Under normal circumstances, the price premiums for different qualities of crude oil in the Middle East vary, so that the types of crude oils that may be delivered are not the required varieties.

New tools for responding to market price fluctuations All

things have a two-sided nature , opportunities and risks have always followed suit. For those who have been fighting for years in the trading business, each shot is a result of repeated weighing of opportunities and risks.

Especially in recent years, the international crude oil prices have fluctuate dramatically, which has had a great impact on the production and operation of oil-related industries and enterprises. According to a simple calculation, the international crude oil price will fluctuate by US$1 per barrel, and China’s crude oil import cost will change by about US$3 billion. The related company’s risk exposure is huge.

For this reason, in the domestic crude oil and refined oil trade, CNOOC’s import and export often use futures and paper products to hedging in order to avoid price risks and lock in trade profits.

In the absence of domestic crude oil futures tools, the company can only use foreign crude oil futures or other financial derivatives to carry out hedging. With the use of overseas futures hedging, the profit and loss of physical goods and paper goods are limited by foreign exchange control and cannot be hedged in the current period of the business. There are financial problems such as overseas prepayments or profitable debts. The introduction of China’s crude oil futures has given companies a new tool to deal with market price fluctuations. The hedging needs generated by domestic operations can be manipulated using domestic futures, thus solving the financial problems that frequently arise between domestic and foreign companies.

“Shanghai Crude Oil Futures is an important segment of the domestic hedging platform created by CNOOC’s import and export.” Yao Jun, deputy general manager of CNOOC Import and Export, said that the company’s current establishment of a futures trading management system with hedging purposes has been running steadily. With the use of Chinese crude oil futures tools, the company can further provide price risk management services for companies within the CNOOC system. In addition, the company can also carry out agent hedging business for oil business customers outside the system, and then develop new trading business.

In terms of physical delivery, the current crude oil futures contracts for China deliver crude oils such as Oman crude oil and Basra crude oil from the Middle East. According to the physical delivery rules of China’s crude oil futures, the current arbitrage will be carried out and a new management method will be provided. Because of the strict margin system for trading, credit default risk can be better avoided.

It is not difficult to see from the policy dynamics in recent years that the country holds a positive attitude toward opening up the crude oil market. The landing of China’s crude oil futures is likely to change the current domestic crude oil trading system. In the future, when the domestic crude oil trading market will be an open city, many domestic customers will use futures delivery as a means of purchasing resources. Therefore, actively participating in domestic crude oil futures can lay a solid foundation for CNOOC’s participation in domestic crude oil trade in the future and seek domestic market share of crude oil.