China is reportedly taking the first steps to pay for oil in yuan: Sources

CNBC

  • Annual trade in oil worth an estimated $14 trillion
  • Pilot could be launched as early as the second half of 2018
  • Beijing could start with crude purchases from Russia, Angola

Employees close a valve of a pipe at a PetroChina refinery in Lanzhou, Gansu province.

Stringer | Reuters
Employees close a valve of a pipe at a PetroChina refinery in Lanzhou, Gansu province.

China is taking its first steps towards paying for imported crude oil in yuan instead of the U.S. dollar, three people with knowledge of the matter told Reuters, a key development in Beijing’s efforts to establish its currency internationally.

Shifting just part of global oil trade into the yuan is potentially huge. Oil is the world’s most traded commodity, with an annual trade value of around $14 trillion, roughly equivalent to China’s gross domestic product last year.

A pilot program for yuan payment could be launched as early as the second half of this year, two of the people said.

Regulators have informally asked a handful of financial institutions to prepare for pricing China’s crude imports in the yuan, said the three sources at some of the financial firms.

“Being the biggest buyer of oil, it’s only natural for China to push for the usage of yuan for payment settlement. This will also improve the yuan liquidity in the global market,” said one of the people briefed on the matter by Chinese authorities.

China is the world’s second-largest oil consumer and in 2017 overtook the United States as the biggest importer of crude oil. Its demand is a key determinant of global oil prices.

Under the plan being discussed, Beijing could possibly start with purchases from Russia and Angola, one of the people said, although the source had no details of anything in the works.

Both Russia and Angola, like China, are keen to break the dollar’s global dominance. They are also two of the top suppliers of crude oil to China, along with Saudi Arabia.

The move would mark a major step in reviving usage of the currency of the world’s second-largest economy for offshore payments after several years of on-again, off-again measures.

If successful, it could also trigger shifting other product payments to the yuan, including metals and mining raw materials.

All three sources, who spoke to Reuters on the condition that they not be named, said the plans were at early stages. Officials at some of China’s state oil companies said they had not heard of such plans.

Crude futures

The plans coincide with this week’s launch of the first Chinese crude oil futures in Shanghai, which many expect to become a third global price benchmark alongside Brent and West Texas Intermediate crude.

Shanghai’s new crude contract is traded in yuan.

Besides the potential of giving China more power over global oil prices, “this will help the Chinese government in its efforts to internationalize renminbi (yuan),” said Sushant Gupta, research director at energy consultancy Wood Mackenzie.

Unipec, trading arm of Asia’s largest refiner Sinopec , has already inked a first deal to import Middle East crude priced against the newly-launched Shanghai crude futures contract.

U.S. bank Goldman Sachs said in a note to clients this week that the success of Shanghai’s crude futures was “indirectly promoting the use of the Chinese currency.”

People’s Bank of China (PBOC), the country’s central bank, did not respond to a Reuters request for comment on the plan. The Ministry of Commerce (MOFCOM) also declined to comment.

Internationalization

China’s plan to use yuan to pay for oil comes amid a more than year-long gradual strengthening of the currency, which looks set to post a fifth straight quarterly gain, its longest winning streak since 2013.

The yuan retained its No.5 ranking as a domestic and global payment currency in January this year, unmoved from a year ago, but its share among other currencies fell to 1.7 percent from 2.5 percent, according to industry tracker SWIFT.

A slew of measures put in place in the last 1-1/2 years to rein in capital flowing out of the country amid a slide in yuan value has taken off some its shine as a global payment currency.

But the yuan has now appreciated 3.4 percent against the dollar so far this year, with solid gains in recent sessions.

“For PBOC and other regulators, internationalization of the yuan is clearly one of the priorities now, and if this plan goes off smoothly then they can start thinking about replicating this model for other commodities purchases,” said the person briefed on the matter.

It would not be easy, however, for China to shift the bulk of its commodity purchases to the yuan because of the currency’s illiquidity in forex markets.

Nearly 90 percent of all transactions in the $5 trillion-a-day currency markets involve the dollar on one side of a trade, while only 4 percent use the yuan, as per a triennial forex survey by the Bank for International Settlements.

Crude Oil Prices Are Up Sharply, But Is The Bakken Shale Play Back?

INVESTOR’s BUSINESS DAILY

Three years after the start of the global oil glut, crude oil prices are rising

and oil industry momentum is picking up.

U.S. benchmark West Texas Intermediate traded on Wednesday 55% above a June 2017 low. In January, crude oil prices recovered above $65 a barrel for the first time since December 2012.

During the downturn, Texas’ Permian and Eagle Ford basins rose to become the star shale oil performers with investors. Now, as industry earnings and crude oil prices continue to recover, investors are looking further afield.

The shale oil fields of the Bakken stretch north from Montana and North Dakota into Canada. The region hosted some of the first stages of the shale oil revolution. But Bakken output peaked in late 2014, then fell off sharply as crude oil prices collapsed due to a worldwide glut.

During the downturn, a number of Bakken producers declared bankruptcy. Others sold assets and shifted their focus to other regions. The Permian and Eagle Ford fields emerged as the premier U.S. shale oil plays. More than a few boomtowns fell quiet in North Dakota and Montana.

Today, the Bakken is regaining steam. Production levels are approaching their 2014 peak. Analysts are turning bullish on Bakken shale play holdouts, including Oasis Petroleum (OAS), Continental Resources (CLR), Marathon Petroleum (MPC), Hess (HES) and ConocoPhillips (COP).

It’s “the number one play” for investors looking to diversify beyond Permian holdings, said Derrick Whitfield, managing director at Stifel.

Politics & Crude Oil Prices

A meeting a week ago between President Trump and a member of the Saudi royal family sent crude oil prices higher. The reason: speculation that the U.S. planned to withdraw from the Iran nuclear deal and impose fresh sanctions. Trump’s appointments of John Bolton and CIA Director Mike Pompeo, both aggressive hawks, bolstered this view.

In addition, the Organization of Petroleum Exporting Countries and Russia are reportedly discussing a production deal that could range to 20 years. Their current agreement props prices by trimming 1.8 million barrels of oil per day from the market. It runs through the end of this year.

Production in Texas’ Permian has been going gangbusters for some time. But the recent rise in crude oil prices has prompted increased activity in shale oil fields with higher break-even prices. That includes the Bakken.

WTI oil at $55 to $60 per barrel means “things start to get interesting in the Bakken,” said Benjamin Shattuck, research director for Wood Mackenzie’s Lower 48 unit. Crude prices closed the week at $64.94 a barrel.

Five years ago, the break-even price for a barrel of oil in the 200,000 square mile Bakken play ran between $70 and $80. Today, that break-even price is closer to $50 to $60, according to Wood Mackenzie data.

That’s still significantly higher than the Permian’s average break-even. Mackenzie says that runs from the high $30s to mid-$40. But it still provides a healthy profit when prices provide enough margin.

The Bakken is one basin that “will be incredibly sensitive to price, the most sensitive of the big three oil plays. But what’s unique and interesting is that it’s very predictable. We know when we drill a well, what it will be like,” Shattuck said.

Geology & Crude Oil Price

The geology of the Bakken is more straightforward than that of the Permian, according to Trisha Curtis, president and co-founder of PetroNerds, an energy analytics and advising firm. Curtis says the Bakken is “like an Oreo cookie:” made up of a main reservoir, held in place by two shale areas on either side.

That well-defined geology has allowed Continental Resources and other key Bakken players to stake out the basin’s prime acreage. New players can’t infiltrate these areas unless they buy assets from owners looking to head south to Texas.

The Permian, on the other hand, has a “muddy layering”of  sub-basins and subplays. This allows operators to find top-producing wells outside the core acreage, but only after risky and expensive exploration.

The Bakken has benefited from advances in well drilling and completion techniques. They are essentially the same advances that have helped lower costs and break-even prices across most shale oil basins.

“The completion design has changed. There is some degree of geosteering that has improved the (Bakken),” Whitfield said. “Proppant loads have increased. You’re more effectively stimulating the reservoir today.”

EIA data show a rising number of drilled but uncompleted wells being restarted in the Bakken. Those DUC wells were drilled, then capped, before the downturn. They come back online as prices rise, needing only to be “completed” by services companies. Prices for pressure pumping and other completion services related to hydraulic fracturing are lower now than they were as production peaked in 2014. Those costs will eventually rise. But, for now, they help to lower producers’ break-even costs.

Bottlenecks And Break-Even Prices

The Permian and the Bakken are the most well-developed U.S. shale oil basins. But both continue to face bottleneck issues. Those issues relate primarily to the takeaway capacity of rail terminals and pipelines. Water supply limitations and truck congestion can also be problems.

The Bakken went through the worst of that phase in 2008 to 2010, Whitfield says.

“A lot of the Bakken from the logistical perspective, like rail and pipe, was all established back during the period,” Whitfield said. “It’s very capital efficient to grow in the Bakken now. You don’t have to build more terminals.”

Outflow from the Bakken received a boost in June last year. That’s when the Dakota Access pipeline — the subject of a year-long protest at South Dakota’s Standing Rock Sioux Reservation — launched operations. The line delivers Bakken oil to a hub in Illinois. The hub then feeds Midwestern refineries around the always thirsty Chicago market.

The Dakota Access has a total eventual capacity of 570,000 barrels per day. Rail transport, such as that which supplies oil to the Philadelphia Energy Solutions refinery, still accounts for as much as 70% of Bakken’s take away. But the new pipeline helps drive down the delivery cost of Bakken oil.

Another price benefit may come from sand. The Permian’s soaring demand for local sand in Texas could help lower fracking sand costs in the Bakken. Some high-quality northern white sand once shipped out of Wisconsin to Texas is now likely to be redirected to the Bakken, Whitfield suggests. The increased supply could force competing sand vendors to lower prices.

Is The Bakken Back?

Last month, Texas-based Smart Sand (SND) announced a $15.5 million deal to expand its facilities in the Bakken. The deal provided rights to the Van Hook train terminal for unloading sand. That outlet will help digest added supply from the Wisconsin frac sand mine it expanded earlier this year.

The Bakken’s recovering production follows a shift among exploration and production companies away from spending to chase rising oil prices.

“Producers are more focused on bringing cash to the bottom line than in the past, when they were more interested in developing proven resources,” said James Williams, an economist at energy consultant WTRG.

While the Bakken is getting increased attention, Curtis said there won’t be a rush of new players, such as has been the case in the Permian.

“I wouldn’t say it’s back. I would say you have core players in the Bakken that are running with it, that it was their baby and that’s going to drive it,” Curtis said.

But so long as prices hold near $60, the Bakken will play a critical role in keeping U.S. shale oil production on an uptrend into the 2020s, Williams says.

“I mean, we are going to keep increasing production at well over 1 million barrels per day a year unless prices collapse,” Williams said. “If they collapse the whole game changes.”

Oil prices rise as OPEC seen continuing supply cuts through 2018

CNBC

  • Oil prices rose on Thursday as the producer cartel OPEC and other suppliers look set to continue withholding output for the rest of the year and potentially into 2019.

Oil jack pumps in the Kern River oil field in Bakersfield, California.

Jonathan Alcorn | Reuters
Oil jack pumps in the Kern River oil field in Bakersfield, California.

Oil prices rose on Thursday as the producer cartel OPEC and other suppliers look set to continue withholding output for the rest of the year and potentially into 2019.

U.S. WTI crude futures were at $64.63 a barrel at 0729 GMT, up 25 cents, or 0.4 percent, from their previous settlement.

Brent crude futures were at $69.76 per barrel, up 23 cents, or 0.3 percent.

The Middle East-dominated Organization of the Petroleum Exporting Countries (OPEC) together with a group of non-OPEC producers led by Russia started cutting output in 2017 to rein in oversupply and prop up the market.

Brent, off which OPEC prices most its crude exports, has risen by around a quarter since then, which has lead to speculation that the restraints on production may be lifted.

But sources at OPEC told Reuters this week that the group and its allies were set to keep their deal on cutting production for the rest of 2018.

Despite this, Brent remained below $70 and WTI under $65 per barrel, weighed by rising crude inventories and production in the United States.

Commercial U.S. crude inventories rose by 1.6 million barrels in the last week <C-STK-T-EIA> to 429.95 million barrels, the Energy Information Administration (EIA) said on Wednesday.

Crude oil inventories up 1.6 million barrels

Crude oil inventories up 1.6 million barrels  

U.S. crude oil production hit a record, at 10.43 million barrels per day (bpd) <C-OUT-T-EIA>. That puts the United States ahead of top exporter Saudi Arabia. Only Russia pumps out more, at 11 million bpd.

In China, Shanghai crude oil futures <ISCc1> opened Thursday’s morning session down nearly 2 percent, pushing the new market near to parity with U.S. prices, before closing at 409.7 yuan ($65.18) per barrel at 0700 GMT.

The latest drop takes the fall since the contract’s launch on Monday to 10 percent.

Despite high volatility and lingering scepticism about Shanghai’s trading hours, along with doubts about the process for physical delivery of crude under contract, most analysts expect the contract to establish itself as a third global oil price benchmark next to Brent and WTI.

Goldman Sachs said in a note to clients that there was “finally, an exchange traded price for Chinese crude oil.”

Shanghai’s “start of trading was relatively successful (as)…it is the first onshore Chinese commodity contract that allows direct trading by foreign investors and is denominated in RMB (yuan), indirectly promoting the use of the Chinese currency,” Goldman said.

The U.S. bank said Shanghai crude futures represented 3 percent of combined WTI and Brent trading volumes since its launch on March 26.

Oil prices fall on surprise US inventory rise; China crude volatile

CNBC

  • Oil prices fell on Wednesday, with Brent falling back below $70 per barrel and U.S. West Texas Intermediate crudes dipping below $65.
  • Traders said the dips came after the American Petroleum Institute reported a surprise 5.3 million barrels rise in crude sticks in the week to March 23, to 430.6 million barrels.
  • Official U.S. inventory data will be published by the Energy Information Administration late on Wednesday.

A pump jack operates at a well site leased by Devon Energy Production Co. near Guthrie, Oklahoma.

Nick Oxford | Reuters
A pump jack operates at a well site leased by Devon Energy Production Co. near Guthrie, Oklahoma.

Oil prices fell on Wednesday, with Brent falling back below $70 per barrel and U.S. West Texas Intermediate crudes dipping below $65, pulled down by a report of increasing U.S. crude inventories that surprised many traders.

U.S. WTI crude futures were at $64.86 a barrel by 0201 GMT, down 39 cents, or 0.6 percent, from their previous settlement.

Brent crude futures were at $69.75 per barrel, down 36 cents, or 0.5 percent.

Traders said the dips came after the American Petroleum Institute (API) late on Tuesday reported a surprise 5.3 million barrels rise in crude sticks in the week to March 23, to 430.6 million barrels.

Official U.S. inventory data will be published by the Energy Information Administration (EIA) late on Wednesday.

“We’ll see how the inventory data looks and whether these recent highs can be challenged again. For the moment it is looking like both WTI and Brent are stalling,” said Greg McKenna, chief market strategist at futures brokerage AxiTrader.

Wednesday’s price falls came despite top exporter Saudi Arabia saying it was working with top producer Russia on a historic long-term pact that could extend controls over world crude supplies by major exporters for many years.

Saudi Crown Prince Mohammed bin Salman told Reuters that Riyadh and Moscow were considering greatly extending a short-term alliance on oil curbs that began in January 2017 after a crash in crude prices.

“We are working to shift from a year-to-year agreement to a 10 to 20 year agreement,” the crown prince told Reuters in an interview in New York late on Monday.

AxiTrader’s McKenna said such an agreement between Russia and Saudi Arabia “effectively means an expansion” of the Organization of the Petroleum Exporting Countries (OPEC), of which Saudi Arabia is the de-facto leader but in which Russia is not a member.

In Asia, Shanghai crude oil futures saw their third day of trading continuing with high volume but also volatility.

Spot Shanghai crude futures were down by 4.4 percent on Wednesday,to 407.5 yuan ($64.93)per barrel by 0201 GMT.

In dollar-terms, that puts Chinese crude prices significantly below Brent and only slightly above U.S. WTI.

McKenna said he hoped Shanghai crude “gets a lot of traction and we end up with three established global benchmarks”, but he cautioned that “the first couple of days have been volatile.”

Oil prices fall as U.S. trade dispute with China looms

CNBC

  • Oil prices reversed early gains on Monday as concerns of a looming trade dispute between the United States and China weighed on global markets.
  • U.S. crude futures were at $65.51 a barrel at 0255 GMT, down 0.6 percent, from their previous close.
  • Brent futures were down 0.3 percent at $70.24.
  • Crude was also squeezed by a rise in the number of U.S. rigs drilling for oil to a three-year high of 804, implying further rises in production.

Oil prices reversed earlier gains on Monday as concerns of a looming trade dispute between the United States and China weighed on global markets.

The possibility of a full-blown trade war between the United States and China battered Asian shares on Monday. The falls came after U.S. President Donald Trump last week signed a memorandum that could impose tariffs on up to $60 billion of imports from China.

U.S. West Texas Intermediate (WTI) crude futures were at $65.51 a barrel at 0255 GMT, down 37 cents, or 0.6 percent, from their previous close.

Brent crude futures were at $70.24 per barrel, down 21 cents, or 0.3 percent.

Crude was also squeezed by a rise in the number of U.S. rigs drilling for oil to a three-year high of 804, implying further rises in production, which has already jumped by a quarter since mid-2016 to 10.4 million barrels per day (bpd).

Earlier in the session, prices were lifted by statements from Saudi Arabia, the de-facto leader of the Organization of the Petroleum Exporting Countries (OPEC), that production cuts that have been in place since 2017 may be extended into 2019, as well as concerns that the United States may re-introduce sanctions against Iran.

“President Donald Trump continues to suggest the U.S. will pull out from (the) Iran nuclear deal, which raises the spectre of bringing back sanctions on the country and severely limiting Tehran’s ability to export crude oil,” said Stephen Innes, head of trading for Asia/Pacific at futures brokerage OANDA in Singapore.

New future

Financial oil markets have long been dominated by Europe’s Brent and America’s WTI, despite Asia being the world’s biggest and fastest growing oil consumer, has so far not had a benchmark.

That possibly changed on Monday, as Asia saw the launch of Shanghaicrude oil futures.

Few analysts doubt that Asia is overdue a financial oil price benchmark, and that China with its vast consumer and production base is a prime location for it.

“The government (in Beijing) seems determined to support it, and I hear a number of firms are being asked or pressured to trade on it, which could help,” said Jeff Brown, President of energy consultancy FGE.

Despite this, Brown said there were concerns over regulatory interference, as seen in other Chinese financial commodity markets, including iron ore and coal.

“The fact that the government is encouraging the exchange and also is not shy about stepping in to occasionally change the rules may discourage international players,” Brown said.

That concern did not scare off global commodity trading giant Glencore, which according to Chinese brokerage Xinhu Futures carried out the first trade on the Shanghai crude oil futures.

One More Leg Up For Crude Oil

Seeking Alpha

Summary

Speculators have set multiple net long position records already this year.

Crude oil’s 13% drop did little to scare the bid.

Crude is heading into a period of seasonal strength.

The last trade in our March seasonal portfolio is in the May crude oil contract. We expect the petroleum rally to continue. Our seasonal program will most likely trigger a buy signal Sunday night. This will make us long both crude and the RBOB unleaded contract. We’ll carry both of these positions through next week when we’ll offset the unleaded. Then, we’ll be long just crude oil through its exit, the first week of April. Obviously, these are highly correlated positions, and risk should be treated accordingly.

We’ve discussed the record-setting imbalance between the speculative and commercial trader positions in the crude oil market both here and in our Commitment of Traders column for Modern Trader magazine. We got a washout of 13%, which I was expecting. However, it did little to shake the speculative bid. Crude oil’s rapid rebound has emboldened the speculative buyers, whom we now expect will push crude oil above the January high at $66.02 for the May contract. In fact, this model projects a top near $68.25 with nearly 70% accuracy. This fits perfectly with a macro scenario that sees the oil drillers’ forward selling capping prices under $70 per barrel

Crude oil margin is currently $2,310. I do expect this to rise as volatility increases.

We will use a dynamic sell stop to protect this long position. Therefore, the risk will change daily and may exceed your initial trade plan’s threshold. We’ll be trailing a protective stop two average true ranges behind the previous day’s close. This has yielded a maximum loss of just over $3,000 in our testing and a projected initial risk of $2,600. The six-month high and low for this calculation is $6,040 and $600. The average loss in our testing has been just under $1,700. Remember, there is a half size mini-crude oil contract as well.

Oil prices rise as Saudi Arabia says production curbs could last into 2019

CNBC

  • Oil prices rose, pushed up by Saudi statements that OPEC and Russian led production curbs will need to be extended into 2019 in order to tighten the market.
  • The rise in oil prices defied global stock markets and other commodities, which slumped on worries about a trade stand-off between the U.S. and China.

An oil pump jack in Gonzales, Texas.

Getty Images
An oil pump jack in Gonzales, Texas.

Oil prices rose on Friday, pushed up by Saudi statements that OPEC and Russian led production curbs that were introduced in 2017 will need to be extended into 2019 in order to tighten the market.

The rise in oil prices defied global stock markets and other commodities, which slumped on the back of worries about a trade stand-off between the United States and China.

U.S. President Donald Trump signed a presidential memorandum on Thursday that could impose tariffs on up to $60 billion of imports from China, while China unveiled plans on Friday to impose tariffs on up to $3 billion of U.S. imports.

U.S. West Texas Intermediate (WTI) crude futures were at $65.09 a barrel at 0045 GMT, up 79 cents, or 1.2 percent, from their previous close.

Brent crude futures were at $69.64 per barrel, up 73 cents, or 1.1 percent.

Traders said the driver for crude futures was a statement by Saudi Arabian Energy Minister Khalid al-Falih, who said on Thursday that OPEC members will need to continue coordinating with Russia and other non-OPEC oil-producing countries on supply curbs in 2019 to reduce global oil inventories.

The Organization of the Petroleum Exporting Countries (OPEC), of which Saudi Arabia is the de-facto leader, as well as a group of non-OPEC countries led by Russia, struck a production supply agreement in January 2017 to remove 1.8 million barrels per day (bpd) from global markets and end a supply glut.

The pact is set to expire at the end of this year, but Saudi Arabia now seems to be pushing for an extension.

“We know for sure that we still have some time to go before we bring inventories down to the level we consider normal and we will identify that by mid-year when we meet in Vienna,” Falih told Reuters in an interview in Washington.

“And then we will hopefully by year-end identify the mechanism by which we will work in 2019.”

Although analysts said the potential stand-off between the United States and China could also hit oil markets, for now most said demand looked healthy. Morgan Stanley also cited a pick-up in seasonal demand in the coming month and geopolitical risk as potential supports for oil prices,

“We are only 3-4 weeks away from peak refinery maintenance, after which crude and product demand should accelerate … Global inventories are already at the bottom end of the five-year range. With the inventory cushion largely gone, oil prices will likely be more sensitive to geopolitical risk factors,” the U.S. bank said.

“There are sufficient reasons to expect oil prices to strengthen further from here, and we stick with our (Brent) $75 per barrel call for Q3,” Morgan Stanley said.