China wants to reshape the global oil market

TRADITIONALLY, to count as an oil power a country had to be a big producer of the black stuff. China is the world’s biggest importer but still wants to break into that exclusive club. On March 26th it launched a crude futures contract in a bid to gain more clout in the global market. Some think that, if successful, the yuan could start to displace the dollar in oil trading. For now, though, that is fanciful.

A previous attempt by China to introduce oil futures, in the early 1990s, failed because of unstable pricing. This time regulators prepared methodically. To ward off speculators, notorious in Chinese markets, they made the storage of oil very expensive. Volumes were light in the first few days of trading—less than a tenth of the averages for similar contracts in New York and London. But all went smoothly. It was a good, if modest, start.

China has two goals. The basic one is to help its companies hedge against volatility. Chinese refiners and traders have struggled to manage currency risks because of capital controls. An onshore contract that lets them lock in the future price of oil in yuan is thus appealing, says Michal Meidan of Energy Aspects, a research firm.

More ambitiously, China hopes to create a standard for oil pricing as a rival to Brent in Europe and West Texas Intermediate in America—a standard that reflects its own supply and demand. For that to happen it needs to attract overseas participation. So, in a first for commodities in China, the contract, hosted on the Shanghai International Energy Exchange, is open to foreigners. Trading runs until 2.30am Chinese time, to overlap with daytime in America and Europe. Glencore and Trafigura, two of the world’s biggest commodity traders, got into the action on the contract’s debut.

Nevertheless, the same restrictions that make it hard for domestic firms to trade abroad will deter foreigners from going deeply into China’s market. To gain access to it they must open special onshore bank accounts. And they cannot use their profits for any other investment in China.

One group of producers who might in theory be tempted are those under American sanctions. For Iran, Russia and Venezuela, trading oil in yuan would wean them off dollar-based earnings and so help them steer clear of American banks. But they chafe under sanctions precisely because they want to be free to spend their cash as they see fit. So long as China quarantines its financial system from the rest of the world, talk of a petroyuan replacing the petrodollar will be premature.