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Market Update: Oil & Gas - March 2018

Market Update: Oil & Gas - March 2018

A closer look at China’s new crude oil futures contract and the impact of geopolitics on the oil & gas market.

China’s new crude oil futures contract and the impact of geopolitics on oil & gas.

China's New Crude Oil Futures Contract

When it comes to energy markets, China is often regarded as a dominant force. This is evidenced by the long list of it being “the world's largest…” importer of crude oil and coal, being the biggest global investor in renewables and having the largest car market in the world. China is also on track to become the largest importer of natural gas (in the form of pipeline gas and LNG).

One of the factors that will contribute to China's continued dominance in the demand for energy is the soon to be launched oil futures contract.

Summarized, the futures contract will have the following:

  • Physically delivered medium sour grades of crude oil (32 degrees API and 1.5% sulfur by weight), including Dubai Crude, Oman Crude, Basrah Light Oil and China's Shengli Oil;
  • Six designated delivery storage facilities (comprised of 5,950,000 cubic meters of approved storage capacity), with three backup storage facilities;
  • Four designated inspection agencies;
  • 36 forward delivery months with the first 12 months available as a rolling monthly contract, and the subsequent 24 months as eight quarterly contracts;
  • Listed on the Shanghai International Energy Exchange (INE), an entity regulated by the China Securities Regulatory Commission (CSRC);
  • Denominated in Yuan (RMB) per Barrel;
  • Begins trading on the 26 March 2018.

The new crude oil futures contract has the potential to give the Chinese buyers more control over its pricing, and further concentrate demand to the grades preferred by Chinese refineries. Importantly, it gives Chinese refiners a more targeted way in which to manage their refinery margins. Of particular concern for users of the contract will be the Chinese government's practice of market interventions (e.g. crude oil import quotas), currency controls and monetary policy.

- Oliver Hsieh, Director, Commodity & Energy Risk Management, KPMG in Singapore

Geopolitics impact on oil and gas

Geopolitics continue to play a significant role in the oil-and-gas scene. From the Venezuelan elections to US relationships with Iran and Russia-Ukraine gas transit issues, the industry is experiencing significant political effects contributing to more stable hydrocarbon prices in the short-term. There are certain signs that the US shale production break-even point may have bottomed out as sweet spots are more difficult to find.

From a longer-term perspective, bullish views on the future electrification of the transport sector make long-term oil demand forecasts highly uncertain, thus limiting the odds of the over 70 USD oil-pricing scenario. Therefore it remains to be seen whether any 2018 developments will make the outlook more definitive.

- Anton Oussov, Global Head of Oil & Gas and Head of Oil & Gas in Russia and the CIS, KPMG in Russia

Analyst estimates: oil

  2018 2019 2020 2021
Min 55.7 54.0 59.0 63.0
Average 61.2
61.6 62.6 65.3
Median 62.0 61.0 62.0 65.0
Max 65.0 70.0 70.0 70.0


  2018 2019 2020 2021
January Avg 61.4 60.7 62.0 65.9
February Avg 61.2 61.6 62.6 65.3
January Median 62.0 60.8 62.0 65.0
February Median 62.0 61.0 62.0 65.0

Analysts estimate: gas

  2018 2019 2020 2021
Min 2.8 2.7 2.7 2.7
Average 3.0 3.0 2.9 2.9
Median 3.0 3.0 2.9 2.9
Max 3.3 3.4 3.2 3.2


  2018 2019 2020 2021
January Average 3.0 3.0 3.0 2.9
February Average 3.0 3.0 2.9 2.9
January Median 3.0 3.0 2.9 2.9
February Median 3.0 3.0 2.9 2.9


Note: The forecasts/analyst estimates above from Brent & Henry Hub are an indication based on third party sources and information. They do not represent the views of KPMG.