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Page added on November 21, 2013
China Fires Shot Across Petrodollar Bow: Shanghai Futures Exchange May Price Crude Oil Futures In Yuan
With the US shale revolution set to make America the largest exporter of crude, however briefly, the influence of Saudi oil is rapidly declining. This has been felt most recently in the cold shoulder the US gave Saudi Arabia and Qatar first over the Syrian debacle, and subsequently in its overtures to break the ice with Iran over the stern objections of Israel and the Saudi lobby (for a good example of this the most recent soundbites by Prince bin Talal ). But despite the shifting commodity winds and the superficial political jawboning, the reality is that nothing threatens the US dollar’s hegemony in what many claim is the biggest pillar of the currency’s reserve status – the petrodollar, which literally makes the USD the only currency in which energy-strapped countries can transact in to purchase energy. This may be changing soon following news that the Shanghai Futures Exchange could price its crude oil futures contract in yuan, its chairman said on Thursday, adding that the bourse is speeding up preparatory work to secure regulatory approvals.
In doing so China is effectively lobbing the first shot across the bow of the Petrodollar system, and more importantly, the key support of the USD in the international arena.
This would be in keeping with China’s strategy to import about 100 tons of gross gold each and every month, in addition to however much gold it produces internally, in what many have also seen as a preparation for a gold-backed currency, which however would require a far broader acceptance of the renminbi in the international arena and most importantly, its intermediation in a crude pricing loop. It is precisely the latter that China is starting to focus on.
China, which overtook the United States as the world’s top oil importer in September, hopes the contract will become a benchmark in Asia and has said it would allow foreign investors to trade in the contract without setting up a local subsidiary.
“China is the only country in the world that is a major crude producer, consumer and a big importer. It has all the necessary conditions to establish a successful crude oil futures contract,” Yang Maijun, SHFE chairman, said at an industry conference.
Yang’s presentation slides at the conference stated that the draft proposal is for the contract to be denominated in yuan and use the type of medium sour crude that China most commonly imports.
It is hardly panic time yet: Reuters adds that industry participants with direct knowledge of the plan have said the contract would be priced in the yuan, otherwise known as the Renminbi, and the U.S. dollar. However, one can argue that the CNY-pricing is for now a test to gauge acceptance of the Chinese currency, and will take on increasingly more prominence as more and more countries, first in Asia and then everywhere else, opt for the CNY-denomination and in the process boost the Renminbi to ever greater parity with the USD.
Here are the punchlines:
“The yuan has become more international and more recognised by the financial market,” Chen Bo, Chinese trading firm Unipec’s executive general manager, told Reuters.
“I don’t think it would be unacceptable for the world to use the renminbi for commodities trading.”
Certainly not, although it would also entail a depegging the CNY from the USD, something which China is for now unable and unwilling to do. Because once the Yuan is freely priced, kiss all those Wal-Mart “99 cent” deals goodbye.
Which in retrospect may be just what the US wants: a very gradual and controlled dephasing of the USD’s reserve currency status. Recall that what the Fed wants at any cost is inflation which has so far failed to materialize at the level demanded by the Chair(wo)man thanks in part to cheap Chinese goods and ongoing US exporting of inflation to China. So if that means a spike in the prices of China imports – so key to keeping US inflation in check – so be it. Because we can already see the Fed’s thinking on the matter – certainly it will be able to always restore the USD’s supreme status in “15 minutes” or less when it so chooses.
Of course, by then China, and the Petroyuan, may have a very different view on the world.
13 Comments on "China Fires Shot Across Petrodollar Bow: Shanghai Futures Exchange May Price Crude Oil Futures In Yuan"
rockman on Thu, 21st Nov 2013 2:02 pm
“With the US shale revolution set to make America the largest exporter of crude, however briefly, the influence of Saudi oil is rapidly declining.” Right of the bat such a ridiculously incorrect statement. I don’t know if the article makes any valid points because I’m not going to bother to read beyond this first idiotic line.
TIKIMAN on Thu, 21st Nov 2013 2:14 pm
Better start to prep people!
ronpatterson on Thu, 21st Nov 2013 2:25 pm
From the article: “China is the only country in the world that is a major crude producer, consumer and a big importer.
This is clearly not so. Though China now imports slightly more oil than the US, the US produces almost twice as much oil as China. Also volume on the Shanghai Exchange is but a tiny fraction of the volume on the NYMEX.
Anyway this is really not that big a deal. The Tokyo Commodities Exchange has been trading oil futures in Yen form day one. Also the
Bloomberg Oil & Energy Prices
TOCOM Crude Oil JPY/kl 65,190.00 +430.00 +0.66% Apr 14 08:21:36
Arthur on Thu, 21st Nov 2013 2:58 pm
China is going to ‘de-Americanize the world’ tiny step by tiny step. BTW, there is not going to be a petroyuan, but the petrodollar is gradually going to be replaced by a mix of currencies, including euro, dollar, yen and yuan. That is: every currency is acceptable as long as it is backed by an economy that can deliver goods in exchange for oil AND does not print money like a madman.
ghung on Thu, 21st Nov 2013 3:06 pm
Hi Ron. The quote is a quote from Reuters who is quoting Yang Maijun, SHFE chairman. Go figure, but this is how disinformation gets propagated.
While oil has been traded in other currencies, I have no doubt that China, Russia, etc. are looking for ways to hand the US its reserve currency hat and show them the door. First step: stop relying on the petro-dollar. After that, its just a matter of time. But we already knew that, eh?
solarity on Thu, 21st Nov 2013 3:23 pm
A glimpse into what went on at the Third Plenum meetings in early November. Insiders knew that there would be a reaction to the blatant devaluation of the dollar. China is letting the US know they do not appreciate the depreciation of their huge US dollar holdings.
This is a smart move by China. After all, oil flows from ME to the world based on prices established in NY and delineated in USD. Since a growing proportion of crude is going to China and India, why should it not be priced more conveniently? The December and January MOMRs from OPEC will be enlightening.
rollin on Thu, 21st Nov 2013 3:30 pm
No inflation, just try buying food and fuel. There has been plenty of inflation since 2000 despite two recessions. Should have been massive deflation but it never really happened.
Real estate came down some but it was so overpriced it looks like it still is in many areas.
CAM on Thu, 21st Nov 2013 6:26 pm
This is just like a game of musical chairs on the deck of the Titanic! And, the music is about to stop for good!!
J-Gav on Thu, 21st Nov 2013 6:48 pm
Rock – I had the same reaction. Anybody who thinks Saudi has somehow become suddenly ‘irrelevant’ really doesn’t understand oil.
Stilgar on Thu, 21st Nov 2013 8:02 pm
This is just one more example of a generalized move away from USD’s as the reserve currency. Small changes add up. Keep printing money and shorting gold, sure, but a lower price for gold helps the east to load up on what will eventually be the basis for a gold backed Yuan. Then what does the Fed do to counter that with too little gold on hand to match it? That’s when we say goodbye to the USD as the reserve currency.
mo on Thu, 21st Nov 2013 10:39 pm
Largest exporter of crude? I think its illegal to export us crude. We couldrnt even if we wanted to. We need to use every drop produced plus import 8 million barrels a day. I think energy independence is a dream, or a lie, depending how you look at it.
Others on Fri, 22nd Nov 2013 3:16 am
It makes sense to use Medium crude as the benchmark since this type of crude is more widely available than Light crude.
This will impact the Crude oil markets itself.
BillT on Fri, 22nd Nov 2013 4:35 am
mo, it is not much, but the US exports about 1.5 million barrels of oil and oil products per year or about 4,000 barrels per day.
I think 2014 is going to be a very interesting year.
American elections
European Elections
Israel/Iran friction and war?
BRICS move from the dollar accelerates.
More inflation and Fed printing.
Stock Market Casino crash?
Obamacare fiasco.
Fukushima
etc.
Are you prepared?