Oil Traders Buy Fast, Sell Fast in World’s Newest Futures Market

LAGOS (Capital Markets in Africa) – Less than two months since trading started, China’s oil futures are proving a hit, but it seems mainly with short-term speculators.

So short-term, in fact, that they’re holding contracts on average for an estimated two hours. That compares with more than 60 hours for London’s Brent crude and 47 hours for West Texas Intermediate in New York, the global benchmarks that China hopes the Shanghai futures will one day rival.

It’s a pattern that’s repeated across China’s commodity futures contracts, from apples to steel; investors buy and sell in quick succession, boosting daily volume, but they cash out at the end of the day, keeping open interest relatively low.

“About 75 percent of investors are individuals, and these people are buying fast and selling fast,” Chen Tong, an oil analyst with Tianjin-based First Futures Co., said by phone. “So far we’re seeing lots of speculation, but not solid hedging, and they are trading solely on speculative events.”

Speculators are integral to any futures market; they provide liquidity and act as counterparties for hedgers who want to reduce price exposure. But excessive speculation can cause exaggerated swings and undermine the viability of the contract as a risk management and price discovery mechanism.

China wants its contracts to rival Brent or WTI as a global benchmark, and for the first time it’s allowed foreign investors to trade the yuan-denominated futures. But it’ll probably need more traders who have skin in the game for longer than a few hours.

A spokeswoman for Shanghai International Energy Exchange declined to comment.

Churn over
Analysis of aggregate open interest, volumes and trading hours illustrates the extraordinary pace at which Chinese investors trade commodities futures, including the new oil contract.

Dividing the average aggregate open interest at the end of each day by the aggregate volume shows the number of futures traded for every outstanding contract. Multiply that ratio by the number of hours in each trading day and you get an estimate for the average tenure of each contract.

For steel rebar futures, one of China’s most heavily traded commodities, the average tenure is almost 6 hours. For apple futures, which were launched at the end of last year on the Zhengzhou Commodity Exchange, it’s less than an hour.

For now, almost all the volume and open interest in oil futures remains in the front-month, another sign that traders are focusing on the short-term, according to Chen.

“Almost all the trading is in the most-active September contract,” he said. “In theory, spread trading should move the most active contract to October by now, but we don’t see that happening.”

LAGOS (Capital Markets in Africa)