Asia Grows as A Crude Oil Price Maker

At a Glance

  • About 200 million barrels equivalent of WTI crude oil futures are now being traded daily during Asian hours.

Soaring crude oil demand from Asia, coupled with recent price volatility has led to an increased need to hedge the commodity.

This increased demand as well as a surge in the United States’ oil production and export to Asia has pushed the adoption of the WTI as a leading crude benchmark in Asia. At the same time, Asia’s growing importance as a marginal buyer of the commodity has also seen it emerge as a price-maker in the global market.

Asia’s Increased Demand

The rise is being driven by end-user consumption ranging from petrol to jet fuel as booming economic activity continues. The Asia Pacific region now accounts for more than 40 percent of primary energy consumption, and this is set to grow. While global energy demand is expected to increase by around a third by 2040, according to the 2018 BP Energy Outlook, Asia is set to contribute to a bigger proportion of that growth. With rising prosperity driving energy demand in the fast-growing developing economies of China, India and other emerging markets in Asia, the region is expected to account for two-thirds of the growth in global energy consumption.

Asia’s increased thirst for oil has also created a greater need to hedge the commodity in the face of recent price volatility. Oil prices have been on a roller coaster ride, with geopolitical news creating wild price swings. This year’s trough of below $60 reached in February was attributed to an easing of earlier supply disruptions as Libya partially restored production; Saudi Arabia and Russia adding new supply; and U.S. President Trump reportedly considering the sale of the country’s emergency oil supplies. Prices subsequently rose – albeit in a zigzag manner – by almost 30 percent to hit a high of $77 in October, before cooling off again.

Pundits are now calling for a watch on inventories at Cushing, Oklahoma, home to the WTI storage hub, with tighter inventories potentially pushing WTI crude prices further up. The resumption of sanctions on Iran could also potentially put a squeeze on supply. Throw in the unknown impact of escalating global trade tensions, and it is anyone’s guess where the price of this “black gold” is headed.

Surge in Trading Volumes

With potential volatility in crude prices, businesses have been increasingly turning to WTI crude futures and options to hedge their oil exposure instead of taking positions or being blind-sided by unexpected price moves. Increased interest from commercial oil companies in Asia has also encouraged greater participation from the region’s financial investors as seen from a surge in contract volumes. WTI volumes traded during Asian hours (8am-8pm Singapore/Hong Kong time) rose 40 per cent year-on-year in 2017 with a three-year compound annual growth rate of more than 60 percent.  About 200 million barrels equivalent of WTI futures are now being traded daily during Asian hours. More recently, an average of 230,000 lots per day (equivalent of 230 million barrels) were traded in June 2018, making WTI the most traded energy derivative during Asian hours.

Liquidity in the contract has also risen. This can be seen by the 2.7 million open positions in the contract – a new record that was set on 16 May 2018. The growing number of open positions suggests that oil companies are now giving more weight to WTI as the world’s leading crude benchmark.

400,000 Barrels Per Day to Asia

This development can be attributed in part to the speed with which U.S. oil producers have built up production for the Asian oil markets following the shale revolution and the repeal of the U.S. crude oil export ban in 2015.

While Saudi Arabia and Russia remain the top global oil producers, the U.S. output surge means it has become a marginal supplier of crude to the world.

Against the backdrop of rising demand from Asia, U.S. crude oil has been making inroads into the region. The U.S. now ships 407,000 barrels per day to Asia – or one-third of the total 1.1 million barrels per day it exported in 2017, according to the Energy Information Administration. The export growth is expected to continue with demand booming from China, South Korea, Japan, India, Singapore and Thailand. According to a BP energy report, by 2035, Asia is expected to account for 70 percent of inter-regional energy net import, making it a key region for price discovery and establishing its own pricing benchmarks.

Global Price Maker?

Trading in WTI futures and options now accounts for 14 percent of overall WTI traded volumes compared with just 2-3 percent before the lifting of the export ban less than three years ago.

This means that Asia is also coming into its own as an oil price-maker instead of just a price-taker. In fact, China has developed its own hedging product. The launch of its Shanghai crude oil futures in March 2018 is a healthy and positive development, as it provides different opportunities for energy traders and hedgers, joining other crude benchmarks such as WTI, Brent and DME Oman. At the same time, the Chinese are also increasingly important participants in the WTI market.

As the region’s voracious appetite for energy continues unabated, it is expected to continue playing a bigger role in price discovery in the global marketplace.

Nicolas Dupuis is Senior Director, Energy Products for Asia Pacific at CME Group

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