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Singapore — China's newly-launched crude oil futures on the Shanghai International Energy Exchange saw its trading volume surge to a record high in early June, a positive sign that a wide variety of financial market players have been keen to contribute liquidity into the new derivative market.

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The trading volume for the front-month September delivery crude futures contract was recorded at 275,006 lots last Friday, the highest since it was launched on March 26, and nearly seven times the 40,656 lots seen on the first trading day, data from INE's website showed.

This normalizes to 137,503 lots based on international practice, as INE counts each side of a trade - the buy and the sell -- as two lots. One lot is equivalent to 1,000 barrels. That means around 137.5 million barrels of crude oil changed hands on paper last Friday, S&P Global Platts calculations showed.

INE crude oil futures' trading volume has been rising steadily since the launch on March 26, with the average daily volume seen at 69,055 lots in April and 170,554 lots in May -- a rise of 147% month on month.



Trade sources said that sharp volatility in global benchmark crude prices may have played a key role in boosting trading interest, especially from retail investors and financial market players including banks, funds, securities houses and hedge funds.

Retail investors, including individual players and short-term day traders, contributed heavily to the recent sharp boost in market liquidity, as such participants typically hope to take advantage of sharp price fluctuations to take quick profits.

"The front-month ICE Brent futures jumped more than $1/b after the release of inventory data last Thursday, but the contract quickly fell below the day's opening level, which [might have] spurred the trading [appetite] of crude futures on INE as well," a trade source in southern China said.

The unusually sharp volatility was the main factor that drove up trading volume and open interest on the day, she said, adding that the contract sees more active trading in the night session (9 pm-2:30 am Beijing time) as participants trade it against benchmarks ICE Brent and WTI.

INE trade participants probably held conflicting views on the market on June 1, with some believing that prices may have entered overbought territory and others that it may extend gains beyond key resistance and moving average levels, said a currency and commodity futures trader based in Seoul for a Chinese bank.

The open interests registered for the front-month September delivery crude contract totaled 33,986 lots last Friday, the highest since it was launched on March 26. This would normalize to around 16,993 lots in accordance with international practice, Platts calculations showed.

"As a crude oil futures contract that has been launched for just two months, its trading volume and open interest has been pretty good," said a second source with Chinaoil, state-owned PetroChina's trading arm.

"China's refineries mainly process medium and heavy sour crudes, while INE's crude futures contract is designed based on a basket of medium and heavy crudes from the Middle East, which provides a good instrument for managing [physical price exposure and risks] for refineries," the Chinaoil source said.


RETAIL INVESTORS MOST ACTIVE


While many state-owned oil majors and industrial players have been trading the crude contract on INE since the launch, retail and financial investors make up the bulk of the trades, market participants noted.

Physical players are cautious about holding positions to delivery as the delivery mechanism has yet to be tested, according to market sources.

"The active participation of speculative players provides sufficient liquidity for the trading of crude oil futures, and it is also one of the important factors for the success of the crude oil futures," said the first trade source in southern China.

"There are many funds and brokerage companies trading the new crude futures currently ... we have also participated into the trading, but not in a big volume," said a third source at a state-owned oil major.

"As a state-owed [refining] major, we can't really 'play' the crude futures, as the government would not like to see the [crude futures] price swing up and down largely," the source said.

"We are still also cautious about taking a position for delivery ... who knows what could happen for the first delivery," the source said, adding it had encountered problems in the delivery process in a trade simulation program.

The bonded storage delivery mechanism involves a range of non-financial market aspects such as customs, border defense, commodity inspection departments and oil storage, market sources said.


STILL FAR BEHIND MATURE BENCHMARKS


Although the new INE crude futures market has been widely considered a success so far, it is still very small compared with mature international crude benchmarks in terms of trading volume and open interest, market participants noted.

Currently, ICE Brent and NYMEX light sweet crude futures are the two leading global benchmarks.

The Brent futures' trading volume averaged 1 million lots/day on ICE in May, with open interest seen at an average of 2.6 million lots in the month, according to data on ICE website.

"The INE crude futures [market liquidity] is unlikely to threaten that of ICE Brent and NYMEX [any time soon], but it could grow to be a regional benchmark for the medium and heavy sour crudes in the future, like DME Oman," the fourth trade source said.

Crude futures trading volumes saw an average of 4,499 lots/day on Dubai Mercantile Exchange in May, smaller than that seen on INE. However, its open interests averaged 54,615 lots in May, higher than that on INE, according to data on DME's website.

--Analysis by Cindy Liang with Gawoon Philip Vahn, Philip.Vahn@spglobal.com
--Edited by Wendy Wells, wendy.wells@spglobal.com