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Traders unable to deliver oil into Shanghai exchange as investors hog storage tanks -sources

Friday, 03 April 2020 | 23:00

Oil traders seeking to take advantage of a price anomaly by delivering crude into Shanghai crude futures contracts are unable to do so as storage designated by the exchange is full, five sources with knowledge of the matter said.

Shanghai crude futures have pulled ahead of ICE Brent, making it attractive for traders to deliver Middle East crude into China’s only crude futures contract at the International Energy Exchange (INE).

But without storage space, sellers are unable to deliver oil even as bids pour in, pushing prices even higher and distorting the market, the sources said.

Some companies are holding onto their warehouse receipts as INE’s storage costs are relatively low, meaning they can continue making a hefty profit by delivering oil into the facilities, the sources said, with one adding that most of the space had been booked and held by investors who treat warehouse receipts as a financial tool.

“The Shanghai crude oil prices are now totally distorted,” he added.

In an emailed reply to Reuters, the exchange said it will satisfy participants’ need for physical deliveries and ensure “stable and orderly” market operations.

“Market arbitrages are basic trading strategies in the futures market. Recently the performance of domestic crude oil futures has been more stable than the international market,” the exchange noted.

Chinese investors have shifted their focus from poor-performing equities to commodities such as oil, betting on price rebounds as China’s stimulus measures kick in, boosting trade volumes to a record.

Front-month Shanghai crude futures fell 4.7% in the month to Friday, versus about a 40% loss in Brent over the same period, data on Refinitiv Eikon showed.

At current prices, there is almost an $11 profit for every barrel of Iraqi Basra Light crude delivered into the INE even after factoring in a jump in freight rates to close to $7 a barrel, another of the sources said.

However, that presumes there is storage space. Even with the addition of another 750,000 cubic metres (4.7 million barrels) in northeast Dalian on Thursday bringing the exchange’s total capacity to about 27 million barrels, storage is still insufficient to keep up with demand, the sources said, with open interest volume jumping to an all-time high of 127.7 million barrels on March 30.

The storage compares with around 90 million barrels capacity around Cushing, Oklahoma, the delivery point for NYMEX crude, according to CME’s website.

The cost for INE storage at 80-90 cents a barrel per month, compared to $1.80 a barrel for supertankers, encourages traders to hold the tanks longer, the sources said.

“It’s a challenge to get to them,” a third one of the sources said.

China launched internationalised yuan-denominated crude oil futures in March 2018, with the aim of establishing an Asian oil price benchmark.

“China wants to build a global benchmark, but this kind of market play is going to scare off international players,” the first source said.

A senior official with direct knowledge of INE’s operations said the exchange stood ready with a slew of measures to meet clients’ demand, including expanding storage capacity when needed.

“The periodic anomaly in the market can offer a golden opportunity to those sharp-minded investors. And this time they seemed to have taken the right bets,” he said, adding that the weakening yuan versus the dollar and rising global shipping costs had also played a part in boosting domestic prices.
Source: Reuters (Reporting by Florence Tan and Chen Aizhu in Singapore and Emily Chow in Shanghai; Editing by Kirsten Donovan)

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