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.

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.

    China’s refiners raised crude oil processing runs to near record monthly levels in October

    REUTERS

    BEIJING (Reuters) – China’s refiners raised crude oil processing runs to near record monthly levels in October as refining margins jumped after the country’s state planner hiked prices for gasoline and diesel at the pump.

    Also on the rise last month, according to data released by China’s statistics bureau on Tuesday, was the country’s natural gas production – jumping 15 percent to a seven-month high as oil majors ramped up output to meet growing winter demand spurred by Beijing’s squeeze on the use of coal for heating.

    The data showed crude runs rose 7.4 percent in October to 50.51 million tonnes, or 11.89 million barrels per day (bpd) on a daily basis, easing off the record pace of 12 million bpd set in September.

    For the first 10 months of the year, refinery output rose 5 percent from the same period a year earlier to 468.92 million tonnes, or 11.26 million bpd.

    “Throughput rose strongly as refiners expect margins to firm, with government raising retail fuel prices in tandem with spikes in the global crude oil market,” said Seng-Yick Tee, senior director at Beijing-based SIA Energy.

    China’s state planner, the National Development and Reform Commission (NDRC), raised both gasoline and diesel retail prices by 150 yuan ($22.60) per tonne on Nov. 2, the second price hike in two months. The higher prices have boosted margins for both state owned and independent refineries.

    The NDRC is set to adjust retail prices again on Nov. 16, with analysts and refiners forecasting another big hike in prices.

    Meanwhile natural gas output rose 15 percent in October from the same month a year ago to 12.4 billion cubic meters, the highest since March.

    Oil majors are ramping up domestic gas production at key fields like Changqing, and also boosting imports of pipeline gas and liquefied natural gas. Demand for the cleaner fuel is set to grow at the fastest pace since 2011, spurred by Beijing’s gasification drive.

    October domestic crude oil production inched down 0.4 percent on year to 16.01 million tonnes, or 3.77 million bpd, hovering close to August’ s record monthly low of 3.75 million bpd.

    Reporting by Meng Meng and Aizhu Chen; Editing by Kenneth Maxwell

    France’s Total third-quarter net profit lifted by strong output and cost savings

    CNBC

    • Total said its net adjusted profit for the quarter hit $2.7 billion, in line with a Reuters poll of analysts’ forecasts
    • The company said its cost reduction target for the year will be more than $3.6 billion compared with the $3.5 billion it had previously expected, as it continued to drive down costs

    Photo: Total

    French oil and gas major Total reported a 29 percent jump in third-quarter net profit as ramp-ups and new projects lifted production, while high demand for petroleum products led to a sharp increase in its refining margin.

    Total’s oil production rose 6 percent in the quarter, while adjusted net operating income from its upstream exploration and production branch soared 84 percent compared with the same period a year ago, buoyed by a rise in the Brent oil price.

    “The group took full advantage of the favorable environment thanks to the performance of its integrated model and its strategy to reduce its breakeven point,” Chief Executive Patrick Pouyanne said in a statement.

    Net adjusted profit for the quarter hit $2.7 billion, in line with a Reuters poll of analysts forecast.

    Production increases in projects such as Kashagan in Kazakhstan, Moho Nord in Republic of Congo and Angola LNG, as well as new concessions such as Al-Shaheen in Qatar, contributed to the 2.581 million barrels of oil equivalent output per day.

    Total maintained its annual production growth target of around 5 percent in 2017, which is expected to remain steady at that level until 2022.

    In the downstream segment, Total said its European refining margin indicator rose sharply to $48.2 per tonne in the third quarter of 2017 compared with $41.4 in the third quarter of 2016 thanks to strong demand for products after last month’s hurricane Harvey led to numerous shutdowns of refining capacity.

    “The downstream benefited from favorable refining margins and increased its results by 18 percent compared to the second quarter, despite the impact of Hurricane Harvey on American operations,” Pouyanne said.

    Total said cost reductions for 2017 will be more than $3.6 billion, above a $3.5 billion target, as it continued to drive down costs such as reducing the number of expensive contractors in places like Nigeria and Angola.

    The company said its cost of production dropped below $5 per barrel during the past three months, ahead of the target of $5.5 per barrel for the year.

    It reiterated a target of $5 billion in savings by 2020 while pursuing efforts to reduce its breakeven point.

    Total’s pre-dividend organic breakeven — excluding acquisitions and divestments — is expected below $30 per barrel this year, and should continue to fall to $20 in 2019.