Growing asian influence on oil markets

We have entered the final month of the year. For oil traders, it has been quite a year of grand and missed opportunities in equal measure. Having commenced at $60.10 per barrel at the beginning of the year, the oil prices surged ahead to reach the highest price of $76.87 per barrel on 3 October. However, since then, oil prices have declined by 35% to break the support level of $50 per barrel on 29 November. While the Western economies continue to influence the oil markets, the Asian markets have conjured up a growing influence in recent times.

The ever increasing demand from developing economies of Asia along with price volatility has led to an increased need to hedge commodity. Growing demand coupled with boost in oil export from the USA to Asian markets has also heralded the adoption of the WTI as a leading crude benchmark in Asia. Likewise, the growing importance of Asia as a marginal buyer of the asset has witnessed the rise as a price-maker in the global markets.

Increasing Demand of Asia

The rising demand is being driven by the end-consumer ranging from petrol to jet fuel as booming economic activities continue to surge. The region of Asia Pacific now accounts for more than 40% of primary energy consumption which is set to further rise in the future. The Asian market is set to contribute a larger proportion with global energy demand expected to increase by around a third by 2040, according to the BP Energy Outlook 2018. Analysts opine that with the rise in prosperity driving the energy demand in fast-growing economies including China and India, the region is forecasted to account for two-thirds of growth in total global energy consumption.

The increased thirst for oil has also created a void to hedge the commodity against recent price volatility. The wild price swings capitulated by geopolitical news has observed oil prices embarking on a rollercoaster ride. The drop at the beginning of the year was attributed to an easing of earlier supply disruptions as Libya partially restored production. Saudi Arabia and Russia added new supply along with the USA reportedly considering sale of emergency oil supplies of the country. Prices tread the range markets before finally succumbing to drop below the support level.

The volatility in crude oil markets has prompted businesses to resort to financial markets to hedge their exposure risks. Increasing interest from oil companies in Asia has also buoyed enhanced participation from financial investors as observed from a surge in the contract volumes. During Asian hours, the volumes in the WTI contracts rose 40% year-on-year in 2017 with a 3-year compound annual growth rate of more than 60%. In hindsight, about 200 million barrels equivalent of WTI futures are now being traded daily during Asian hours. In June 2018, an average of 230,000 lots per day was traded, making WTI contracts the most traded energy derivative during Asian hours.

Daily 400,000 Barrels to Asia

The expansion is fittingly attributed in part to the speed with which the US oil producers have enhanced production for oil markets of Asia following the Shale revolution and revoking crude oil export ban in 2015. While Saudi Arabia and Russia continue to dominate global oil markets, the US output surge means it has become a marginal supplier of crude to the world.

Due to the rising demand from Asia, the US oil markets has garnered major inroads into the region. According to Energy Information Administration, the USA now ships 407,000 barrels daily to Asia. The export growth is set to continue with demand booming from China, India, South Korea, Japan, Singapore and Thailand. By 2035, Asia is also expected to account for 70% of inter-regional energy net import, making it a key region for the mechanism of price discovery thereby establishing its own pricing benchmark, according to BP energy report.

Will Asia Become a Global Price Maker?

Talking about numbers, trading in WTI futures and options contracts now account for 14% of overall WTI traded volumes compared with just 2-3% before lifting of the export ban less than three years ago. Statistically, Asia is also emerging as an oil price-maker instead of just a price-taker. China has initiated the race by developing its own hedging product. The launch of the Shanghai crude oil futures in March 2018 presents a positive development as it provides opportunities for numerous energy traders and hedgers.

As the region’s insatiable appetite for oil continues, the markets are expected to continue playing a larger and more significant role in its endeavour of chairing the price discovery position in the global marketplace in the not too distant future.


Vivek Risal is associated with Mercantile Exchange Nepal Limited in the capacity of Manager in Research and Development Department. He can be contacted at r&[email protected]

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