The new low-sulfur heating oil (LSFO) contract features marine fuel meeting. Stricter international emissions rules and is that the latest commodity futures product. Second oil contract after Shanghai crude – hospitable foreign investment.
With few competitors, the contract stands a good chance to grow into an Asian benchmark for shipping fuel, said, traders and brokers. Especially as about 20 Chinese refineries are freshly equipped to supply the low-sulfur fuel.
The contract could also further Beijing’s ambition to create a bunkering hub in eastern China’s Zhoushan port to challenge Singapore for the multi-billion dollar shipping fuel market.
Senior managers at state refiners and global trading firms told Reuters they’re also keen to trade the contract and can monitor the market from Monday.
The exchange will pick a few dozen financial investors as market makers to spice up initial liquidity, said INE officials.
“We hope to supply the market a far better tool to hedge risks because the global shipping industry transforms. From high to low-sulfur fuel and satisfy the necessity for an Asian marine fuel benchmark,” said one INE executive.
China removed a consumption tax on heating oil this year and issued it. Its first-ever supply quotas for 10 million tonnes of the new 0.5% sulfur marine fuel. Earlier counting on imports from Singapore for its bonded bunkering market of about 12 million tonnes a year.
Compared to Shanghai crude
Compared to Shanghai crude, the LSFO contract features a more diversified investor. The base that has traders and bunker operators, on top of the most state. Refiners and financial investors that dominate the crude contract.
With a lower threshold for opening an account at 100,000 yuan ($14,100) versus 500,000 yuan for petroleum, the LSFO contract could draw more retail investors.
“With the tax waiver, domestic refinery production has become the most force which will give us pricing advantage and trading volumes,” said Yang Jiaming, an analyst at CITIC Futures, adding that the contract’s volumes could top Singapore’s over-the-counter LSFO swaps.
China has 14 licensed bonded bunker suppliers, four of whom have said they’re going to trade the LSFO contract.
“We’ll be closely monitoring the contract and can jump in once. Arbitrage opportunities between Singapore and North Asia emerge,” said a Beijing-based executive with a worldwide trader.
The contract faces challenges like limited warehouse space. A problem that squeezed deliveries against the INE crude accepts April.
INE also has stricter product specifications – like for viscosity and density – than those prevailing in Singapore trade, and this might hamper arbitrage deliveries, traders said.
INE didn’t immediately answer requests for comment about these market concerns.
