On March 26th, the Shanghai Crude Oil Futures (635, 2.30, 0.36%) celebrated its sixth anniversary of listing. Over the six years of development, the Shanghai crude oil futures market has operated steadily, with a continuously enriching participant base and a progressively improving ecosystem. It effectively reflects the supply and demand situations in China and the Asia-Pacific region, becoming an indispensable component of the international crude oil market and achieving a sustained enhancement in its functional quality.
In 2023, the international oil prices experienced wide fluctuations amidst weak macroeconomic expectations, significant production cuts by OPEC+, and geopolitical influences. The Shanghai crude oil futures remained highly correlated with overseas crude oil futures prices, while also more rapidly reflecting changes in regional spot markets, with a notable increase in participation from overseas traders. Simultaneously, the price application scenarios and risk management methods of Shanghai crude oil futures continued to diversify.
Officials from the Shanghai Futures Exchange (SHFE) indicated that they would closely follow the developments in the international crude oil market, continuously optimize rules and regulations, innovate trading mechanisms, and provide a richer variety of products and higher-quality services for global investors to manage risks effectively.
From a global perspective on crude oil futures prices, as of December 29, 2023, the settlement price of the main contract for Shanghai crude oil futures was 552.5 yuan per barrel (approximately $77.84 per barrel), while the settlement prices of the main contracts for Brent crude oil futures and WTI crude oil futures were $77.04 per barrel and $71.65 per barrel, respectively. In 2023, the correlation coefficients between Shanghai crude oil futures and Brent and WTI crude oil futures were 0.91 and 0.93, respectively.
Yang An, head of energy research at Haitong Futures, explained that Shanghai crude oil futures have maintained a strong correlation with international crude oil futures, utilizing Middle Eastern crude oil as the primary delivery grade. It has integrated well into the global crude oil price system, effectively reflecting the regional supply and demand differences through changes in price differentials with Brent, WTI, and Middle Eastern Dubai-Oman crude oils.
In addition to reflecting differences in spot fundamentals through domestic and foreign price differentials, the price and warehouse receipt volume of Shanghai crude oil futures also reflect the market's own characteristics. In 2023, with the recovery of domestic demand and expansion of refining capacity, China's crude oil processing volume significantly increased, driving growth in crude oil imports, with the annual apparent consumption of crude oil reaching about 773 million tons, an increase of 8.41% year-on-year; crude oil imports reached 564 million tons, up by 10.96% year-on-year. Crude oil inventories showed a trend of accumulation in the first half of the year and depletion in the second half. Shanghai crude oil futures inventories effectively reflected the overall changes in China's crude oil inventories and refinery operating rates. The spread between the first contract of Shanghai crude oil futures and the first contract of Brent crude oil futures exhibited a trend of starting low and ending high, showing a more obvious negative correlation with Shanghai crude oil futures inventories.
She Jianyue, assistant general manager of Yide Futures, believes that the price of Shanghai crude oil futures is highly correlated with international crude oil futures and benchmark spot prices, while also providing guidance for future arbitrage opportunities through the fluctuation of spreads between contracts of consecutive months.
"In addition to maintaining a high correlation with Middle Eastern and Western crude oil prices, we have found in recent years that Shanghai crude oil futures often lead overseas markets in certain key moments," said Yang An to Futures Daily reporters. For example, in October 2023, after the outbreak of the Israel-Palestine conflict, international oil prices briefly surged. However, despite some institutions advocating for bullish oil prices again based on geopolitical factors, prices did not sustain significant gains but remained volatile, subsequently weakening due to poor demand performance. Shanghai crude oil futures showed a more sensitive response to weak demand, breaking through support levels ahead of other global crude oil markets, leading the downward trend in the fourth quarter.
"As the world's largest crude oil importer, when there are changes in China's crude oil demand, Shanghai crude oil futures often lead European and American markets in either rising or falling trends. This means that Shanghai crude oil futures have begun to fulfill their price discovery function, serving as an important representative benchmark oil for the demand side of the crude oil market, transmitting relevant information to the world through price changes," Yang An said.
In 2023, the scale of the Shanghai crude oil futures market remained at a high level since its listing, with an increasingly improved structure of market participants.
To effectively guard against geopolitical risks and the transmission of downward risks in the overseas macroeconomic environment, the margin requirements for Shanghai crude oil futures remained at a high level of 15% in the first half of 2023. Additionally, due to a significant decrease in price volatility compared to 2022, the overall trading volume and open interest of the Shanghai crude oil futures market slightly decreased. In 2023, the average daily trading volume of Shanghai crude oil futures was 204,700 contracts (single-sided, the same below), down by 7.53% year-on-year; the average daily open interest was 65,100 contracts, down by 6.01% year-on-year; the cumulative trading volume reached 287.8 trillion yuan, making it the largest variety in China's futures market in terms of trading volume.
Regarding deliveries, as of the end of 2023, Shanghai crude oil futures had a total of 10 delivery warehouses with a combined total of 17 storage points; the total designated storage capacity was 17.99 million cubic meters, with an active capacity of 12.12 million cubic meters. In 2023, a total of 40,608 contracts were delivered for Shanghai crude oil futures, equivalent to 4.0608 million barrels, with a delivery amount of 23.451 billion yuan.
The performance of Shanghai crude oil options in 2023 was also remarkable. Crude oil options were reasonably priced, the market operated smoothly, and they were closely linked to crude oil futures, with the market scale showing a rapid growth trend. The implied volatility of the main series of crude oil options in 2023 generally ranged from 20% to 40%, and the trend overall was consistent with the historical volatility of the underlying futures, effectively reflecting the expected volatility. When the market price of the underlying crude oil futures fluctuated significantly and trading volume changed dramatically, the trading volume of options also changed correspondingly, with the characteristics of jointly managing price risks with futures being evident.
From the perspective of trading data, in 2023, the average daily trading volume of Shanghai crude oil options was 59,000 contracts, an increase of 116.26% year-on-year; the average daily open interest was 33,900 contracts, an increase of 55.25% year-on-year, showing a rapid growth trend in market scale. The proportion of options trading relative to the underlying futures was 28.84%, up by more than 16 percentage points from 2022, reflecting investors' active use of options to manage risks. Among them, the proportion of trading by general corporate clients increased by more than 6 percentage points from 2022, and the participation level of institutional clients continued to rise. The proportion of trading by overseas clients increased by approximately 17 percentage points from 2022, indicating a significant increase in internationalization.
In addition, in 2023, a total of 44,498 crude oil options were exercised, of which the exercise volume at expiration was 42,260 contracts, accounting for 94.97%. The exercise overall was the exercise of in-the-money options at expiration, with no occurrence of deep out-of-the-money exercise, effectively connecting the crude oil options and futures markets in a stable and efficient manner.
In the view of Lu Zhenxing, head of the Baocheng Futures Research Institute, these data reflect a significant increase in participation in Shanghai crude oil futures by various parties, with domestic and foreign industrial clients actively using crude oil options for risk management, and the initial emergence of the functions of futures and options serving the real economy. The growth of trading volume and open interest in crude oil options, which enable more diverse hedging strategies than single futures instruments, is a natural outcome.
Yang An also believes that options, as an important part of the derivatives market, can enrich the "toolbox" of asset allocation and risk management for institutions and industrial clients. With more and more investors paying attention to and participating in the crude oil options market, there is still considerable room for the future development of crude oil options.
Source: https://finance.sina.com.cn/money/future/roll/2024-03-27/doc-inapteav9895765.shtml
