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Highlights

Low Shanghai Crude price attracts re-exports

But China's domestic appetite seen as key hurdle

Singapore — China's Shanghai Crude futures contract is changing from reflecting a CIF China crude price to becoming more of a "distribution center" price as the barrels delivered into the contract were increasingly sold on and shipped overseas, Wang Fenghai, CEO of the International Energy Exchange, said during the virtual 36th Asia Pacific Petroleum Conference Sept. 14.

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During an interview hosted by S&P Global Platts president Martin Fraenkel, Wang said the price difference between the SC futures contract and other international benchmarks in 2020 had encouraged the re-export of barrels.

By end June, the correlation between the SC futures contract and the Brent and Oman crude futures prices was as high as 98%, Wang said.

But "when supply and demand in the domestic and overseas markets diverged, SC had its own price movements," he added.

SC's front month contract price has mostly been lower than DME Oman since June, even though it is a CIF China price for medium sour crude with Oman as a deliverable crude grade, INE data showed.

"Thus the SC price was more competitive and attracted players to take the barrels out of INE's warehouse, and some of them were sold to other countries," another source with INE said.

China's crude buying interest has fallen since June amid record high stocks after refiners took advantage of the low prices in March and April and imported aggressively, before recovery in domestic consumption was interrupted by floods.

At least 2.17 million barrels of crude was re-exported to South Korea from INE warehouses in Shandong and Hainan provinces over June-August, S&P Global Platts data collected from industrial sources showed.

Over full year 2019, 3.416 million barrels of crude delivered for the contract were sold to other countries -- 72% or 2.465 million barrels re-exported to South Korea, and 951,000 barrels to Myanmar to supply PetroChina's Yunnan Petrochemical refinery in southwest China via pipeline, according to the source with INE.

The Yuan-denominated futures contract has been developing steadily since its launch in March 2018 on the back of China's crude demand.

In terms of the number of barrels traded, the SC contract has become the third-largest crude oil contract by volume in the world behind Brent and WTI, Wang said.

In the first half of the year, the average daily trading volume of the SC contract was 170 million barrels, up 3% year on year, and average daily open interest 110 million barrels, up 286%, Wang added.

The SC contract attracts clients from more than 20 countries including the UK, Switzerland, Singapore, UAE, Australia, Japan and Thailand, he said, adding the average daily trading volume and open interest contributed by overseas clients rose 2% and 6.5%, respectively, on a year-on-year basis in H1.

CHINA'S EXPORTS REMAIN LOW

"It will take time for China to become a distribution center as the country's hefty and growing crude appetite is set to digest almost all the barrels it imports," a Singapore-based trader said.

Over January-July, China exported 446,735 mt (3.27 million barrels) of crude oil including cargo re-exports, down 33.5% on year, latest data from the General Administration of Customs showed.

In comparison, the country was the world's top crude importer, receiving 2.36 billion barrels over January-July, up 12.1% on year, the GAC data showed.

Moreover, China's appetite is set to increase, as around 740,000 b/d of new refining capacity is expected to come online in 2021, Platts data showed.

Meanwhile, "Beijing has been urging oil companies to build crude stocks for the country's energy security as it relies on imports for about 74% of its crude supplies. This will continue to keep the barrels within its territory rather than distribute to elsewhere," a Hong Kong-based analyst said.

China's crude inventory was 891.43 million barrels in the week ended Sept. 13, edging down from a record high of 893.55 million barrels in the week Aug. 17-23, but up 18.3% year on year, according to data intelligence Kpler.

China is set to add at least 15.11 million cu m or 95.04 million barrels of commercial crude storage tanks in 2020, Platts has reported. The country currently has at least 1.27 billion barrels of crude storage capacity, according to Kpler.