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.

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.

US Crude Oil Futures near 1-Week High

Market Realist

US crude oil futures 

April WTI crude oil futures contracts rose 2.2% to $62.57 per barrel on March 5, 2018—the highest settlement since February 27, 2018. Brent crude oil futures contracts rose 1.8% to $65.5 per barrel on March 5, 2018.

The Energy Select Sector SPDR ETF (XLE) and the Vanguard Energy ETF (VDE) rose ~1.1% and ~1.3%, respectively, on March 5, 2018. These funds have exposure to upstream energy companies.

image002

Crude oil and ETFs’ performance 

Crude oil prices rose on March 5, 2018, due to the expectation of a fall in Cushing crude oil inventories, supply outages in Libya, strong demand, and ongoing supply cuts.

However, US crude oil prices declined ~2% on February 26–March 5, 2018. Prices declined due to the larger-than-expected rise in US oil inventories, an unexpected rise in gasoline inventories, and record US oil production.

The SPDR S&P Oil & Gas Exploration & Production ETF (XOP) and the VanEck Vectors Oil Services ETF (OIH) decreased 0.1% and 2.1%, respectively, on February 26–March 5, 2018. XLE and VDE declined 2.2% and 2%, respectively, during the same period. XOP outperformed the other energy ETFs. These ETFs have exposure to oil and gas companies.

Crude oil inventory report  

On March 7, 2018, the EIA will release its crude oil inventory report. Bloomberg estimates that US oil inventories could have increased by 2.5 million barrels on February 23–March 2, 2018. A larger-than-expected increase in US crude oil inventories could pressure oil prices. 

Crude Oil Price forecast for the week of March 5, 2018

Investing.com

Technical Analysis

The crude oil markets have been negative during the week, as we have broken below an uptrend line recently, and have retested it during this week, only to fail again. This is a negative sign.

Crude Oil weekly chart, March 05, 2018

WTI Crude Oil

The WTI Crude Oil market fell significantly during the week, as we have tested the previous uptrend line, but found it to be resistive as one would expect. Technically speaking, this is a very negative sign and I anticipate that oil will roll over from here. That’s not to say that it will be easy to trade this market, but I do think that there is quite a bit of negativity. I believe that if we continue to go down to the lower part of the candle, I think we will then reach towards the $50 handle. Ultimately, I have no interest in buying this market, and if the US dollar continues to strengthen, that could also put pressure on this market.

Brent

Brent markets also fell, as the uptrend line has been tested for resistance, the sellers came in and jumped all over the market. I think that the market will probably go down to the $60 level next, perhaps the $55 level after that. The market continues to be very noisy, but I think that the rising US dollar is the least of the issues. The market will continue to see concerns about the tariffs being placed in the United States, as it could spread into the petroleum markets. If that’s the case, things could get ugly really quick, driving down global demand. However, I think that at this point the biggest problem is going to be the oversupply of crude oil, which of course is the most fundamental driver.

WTI Video 05.03.18

Brent weekly chart, March 05, 2018

Crude Oil Rises Above A Significant Technical Level

Seeking Alpha

Summary

The May 2015 high stood as a line in the sand for oil.

Crude oil rises to the highest level since 2014 as inventories and rig counts in the U.S. decline.

Brent is flirting with $70 per barrel.

Economic data is supportive of oil.

A crowded trade.

On June 21, 2017, things were looking pretty bleak for the crude oil market. Critical technical support stood at the November 2016 low at $42.20 per barrel on the nearby NYMEX futures contract, and the price fell through that level to a low of $42.05. Many market analysts were calling for a test of the $40 level while others believed that the energy commodity was on its way back to a thirty handle.

The spring OPEC meeting disappointed many bulls who were hoping for an extension of production cuts through all of 2018 and all they got were three more months to the end of Q1 2018. However, the price of oil found a significant bottom at the June 21 low, and since then it has been off to the races and a one-way bullish street for the energy commodity. In early August, the price was back at the $50 level, and after a correction down to $45.58 in late August, the higher low took NYMEX crude on a bullish journey that culminated in a new high for the year in late October and early November. Crude oil continued to move to the upside and finished 2017 over $60 per barrel, a level not seen since 2015.

The May 2015 high stood as a line in the sand for oil

Crude oil rose from its low for 2017 to its high over a period of five months, and it kept on going.

Source: CQG

As the monthly chart highlights, crude oil rose to over $60 per barrel at the end of 2017 and the next level of critical resistance stood at $62.58 per barrel the May 2015 high. NYMEX futures reached that level when they were on their way down from highs of over $107 in June 2017, and the price was the result of a dead cat bounce that eventually took the energy commodity to its February 2016 low at $26.05 per barrel. Crude oil has been moving higher alongside rising open interest which provides a degree of technical validation to the bullish trend. While the energy commodity has moved into overbought territory on the monthly chart, the price took out the area of technical resistance last week.

Crude oil likely to hit $80/bbl mark in 2018;

10 stocks which are likely to get impacted the most

The rally which started in the crude oil price may not be over yet. Most experts tracking the commodity sees it heading towards $80-90/bbl in the next two years.

MONEYCONTROLL.com

Kshitij Anand
    The crude which was trading around $50/bbl at the beginning of the year 2017 climbed to $68/bbl in the first week of January 2018, resulting in a rally of over 20 percent in the crude oil prices in the last one year.

    Higher oil prices do pose a concern for fuel importing countries like India which would have an adverse impact on the economy as well as companies which used crude as part of the raw material in their product.

    The rally which started in the crude oil price may not be over yet. Most experts tracking the commodity sees it heading towards $80-90/bbl in the next two years.

    The rise in global crude prices is backed by output cut by OPEC & Russia, freezing weather in the US which has fueled demand for heating oil. Strong economic data from major economies, and falling crude oil inventories coupled with Middle East tensions will keep the commodity on trader’s radar.

    “We maintain our bullish view on Brent crude oil prices and expect the prices to trade between US$80-90/bbl during the next two years. Our positive bias on crude is mainly supported by OPEC’s (along with Russia, non-OPEC member) decision to maintain production cuts throughout 2018 which will partly balance demand-supply situation,” Sumit Pokharna, Deputy Vice President Research at Kotak Securities told Moneycontrol.

    “Apart from that declining US crude inventory levels, rising global oil demand, seasonal factors (winters), higher refining margins leading to higher crude demand from refiners, large speculative position building up, geopolitical concerns, etc. are all contributing to higher crude oil prices,” he said.

    Even the domestic fuel prices have been steadily rising for several months as global crude prices have soared almost 40 percent in the last few months. The rise in crude oil prices has a bigger implication for India – first, it does put a strain on countries current account deficit, and the other major worry is that it leads to rise in inflation.

    “Higher oil price is posing a concern as a continuous rise in crude oil price is expected to have adverse macroeconomic implications. It may not just fuel inflation, but may also deteriorate the twin deficits (current account deficit and fiscal deficit),” D.K. Aggarwal, Chairman and Managing Director, SMC Investments, and Advisors told Moneycontrol.

    “As RBI is already keeping a close eye on inflation, it may give limited room for RBI to slash rates in coming months and this may affect corporate profits, even turn the investment sentiment negative,” he said.

    Technical View:

    Crude oil formed an inverse Head and Shoulder Pattern on the weekly chart, which is a bullish pattern. The pattern is formed on the weekly chart, which indicates that crude could be in a medium to long-term bull run.

    “The immediate support comes around $55 followed by $52, which could hold any dips in the prices. Medium-term Supports are around $42/40,” Priyank Upadhyay, AVP Commodity Research at SSJ Finance & Securities Pvt Ltd told Moneycontrol.

    “Prices are also trading well above the 8,20 and 50 week moving averages which indicates positive momentum to continue. From the above analysis, we see prices could head higher towards our minimum target of $68 and the inverse head and shoulder pattern targets come around $80,” he said.

    We have collated a list of stocks which are likely to get impacted adversely or positively by a rise in crude oil prices:

    Analyst: Priyank Upadhyay, AVP Commodity Research at SSJ Finance & Securities Pvt Ltd

    ONGC: Positive

    The breakeven cost for ONGC is $45-47 per barrel. And, if the crude oil prices remain above $47 per barrel it will benefit ONGC.

    HPCLBPCL: Negative

    OMCs like HPCL and BPCL will be hit by rising crude price as we believe they will not be able to pass on the entire rise to the end consumer as the government would not like to make diesel/ petrol costlier at this juncture.

    Reliance Industries Ltd: Positive

    Reliance Industries (RIL) derives more than 50 percent of profit from refining which is benefitted from rising the crude price. Hence we believe the rising crude price will improve the bottomline for the oil & gas major.

    Disclosure: Reliance Industries Ltd. is the sole beneficiary of Independent Media Trust which controls Network18 Media & Investments Ltd.

    Chennai Petroleum Corporation Ltd: Positive

    Rising crude price will improve GRM’s for the company and we also believe that rising crude prices will lead to inventory gains for the company.

    Analyst: Sumit Pokharna, Deputy Vice President Research at Kotak Securities

    CPCL, MRPL: Simple refiners like CPCL and MRPL will see pressure on GRMs, operating cost will increase, interest cost will go higher due to the higher working capital requirement, etc.

    Analyst: Soumen Chatterjee, Head of research, Guiness Securities

    IOC: Negative

    Q3 Net Profit Margin may slightly weigh on the downstream (Oil Marketing) business but the impact will be limited as domestic fuel prices are linked to international rates.

    Meanwhile, inventory gains due to higher crude prices in last 3 months can also lead to higher earnings. The stock price has corrected from its peak and taking support around 380-390 levels. We Maintain Buy with Target Price of Rs450.

    Aviation Stocks (Jet AirwaysSpiceJetInterGlobe Aviation):

    The rise in ATF prices will have a negative impact on operating margins of aviation stocks such as Jet Airways, SpiceJet, InterGlobe Aviation as fuel bills account for almost 50 percent of the operating costs of an airline.

    However, having said that, the overall growth trends (40-month double-digit growth in Pass segment) in the sector outpaces any such negatives. Lately, the stock prices have moved steadily higher, we recommend to book profits & wait for dips (5-10%) to re-enter in them. (Neutral View)

    Analyst: Mustafa Nadeem, CEO, Epic Research

    Cairn India: Positive

    The company is primarily engaged in Oil and gas exploration with a major role and also sells its oil to other refineries which are from the public as well as private sector. Prices are also in tandem with crude oil and may continue to do well.

    Disclaimer: The views and investment tips expressed by the investment experts on moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

    Venezuela oil-backed cryptocurrency to launch in days, government says

    CNBC

    • Venezuela’s cryptocurrency will launch within days and be backed by 5.3 billion barrels of oil worth $267 billion
    • The launch is a bid to offset a deep financial crisis, the socialist government said on Thursday
    • President Nicolas Maduro surprised many earlier this month when he announced the “petro” cryptocurrency

    Venezuela's President Nicolas Maduro (C) gestures as he speaks during a rally supporting him and opposing U.S. President Donald Trump, in Caracas, on August 14, 2017.

    Carlos Becerra | Anadolu Agency | Getty Images
    Venezuela’s President Nicolas Maduro (C) gestures as he speaks during a rally supporting him and opposing U.S. President Donald Trump, in Caracas, on August 14, 2017.

    Venezuela’s cryptocurrency will launch within days and be backed by 5.3 billion barrels of oil worth $267 billion, in a bid to offset a deep financial crisis, the socialist government said on Thursday.

    President Nicolas Maduro surprised many earlier this month when he announced the “petro” cryptocurrency, to be backed by OPEC member Venezuela’s oil, gas, gold and diamond reserves.

    Despite the skepticism of cryptocurrency experts who do not think Venezuela has the wherewithal to pull it off, communications minister Jorge Rodriguez said the first petro offering would come within days.

    “Camp one of the Ayacucho block will form the initial backing of this cryptocurrency,” Rodriguez told reporters, referring to part of Venezuela’s southern Orinoco Belt.

    “It contains 5.342 billion certified barrels of oil. We’re talking about backing of $267 billion,” said Rodriguez, adding that that differentiated the petro from other cryptocurrencies such as Bitcoin.

    Miners were already lined up, he said, without giving more details. Cryptocurrencies are obtained by users setting up computers to do complex mathematical calculations in a process known as mining.

    Cryptocurrencies are decentralized and their success relies on transparency, clear rules and equal treatment of all involved. Venezuela gave no technical details about the petro.

    The government appears to be hoping the petro will offset a collapse in Venezuela’s currency – 97 percent in one year against the U.S. dollar on the black market – and isolate the country from the U.S. dollar and Washington.

    Rodriguez also hopes to use the petro as part of a mechanism to pay international providers, many of whom have stopped supplying to Venezuela given its inability to pay its debts.

    With Venezuela’s 30 million people suffering shortages, runaway prices and a fourth year of recession, Maduro has long blamed the U.S. government for an “economic war” against it. Critics say incompetent policies are to blame for Venezuela’s economic mess.

    Earlier on Thursday, Maduro blamed U.S. pressure on Portugal for blocking imports of pork leading to a shortage over Christmas in Venezuela.

    U.S. President Donald Trump’s administration has imposed various political and financial sanctions on Maduro’s government, accusing senior officials of rights abuses and corruption.

    “It will be materially impossible for the dictatorial financial centers of the world to intervene against this initiative,” said Rodriguez, citing the Portugal case.

    “It will allow us to overcome any financial blockade.”

    Cryptocurrencies have grabbed global attention partly because of the remarkable rise in the price of Bitcoin, making millionaires of many early investors, including some in Venezuela who used Bitcoin and other cryptocurrencies to shield themselves from strict foreign exchange controls which economists blame for the crisis.