China, the world’s largest oil importer, has launched its first ever yuan-denominated oil futures on the Shanghai International Energy Exchange this week. Observers have pointed out that the crude futures could emerge as a new benchmark, providing Beijing with extra pricing power and helping with the internalization of the yuan.
Sputnik discussed the significance of China’s new futures with Bill Holter, a US precious metals broker and analyst.
Sputnik: In your view, how significant are these contracts launched by China? What impact will they have on the oil market?
Bill Holter: China watch is extremely important because now they are the largest importer in the world and whatever is settled in yuan is not settled in dollars, so that’s going to create less demand for dollars.
Sputnik: Do you think this is going to happen anytime soon? Some have been saying that we have to look at what’s going to happen with the Saudis who, on the one hand, have a huge loyalties and dependancy on weapons and for trade with the US, but they also have a lot of interest in China, so how do you see this playing out?
Bill Holter: It may go slowly until it flips like a light switch, you are correct, the Saudis are the wildcard. If they were to announce that they’re going to ship oil to China in yuan that would be a light switch, and I would mention to you that this has been in the works for quite a while, and there has been a deal between China and Russia to import oil from Russia using the local currencies, the ruble and the yuan, so the move away from the dollar has already started, the beginning of the contract was only the official stamp because oil has already been settling in the non-dollars for a while.
Sputnik: What does China have going for it in terms of its ability to sway the Saudis?
Bill Holter: It’s an obvious tell that China is going to participate in Saudi Aramcob that shows you right there that the Saudis are beginning to be swayed by the Chinese so this is not a matter of if, it’s a matter of when.
Sputnik: What do you think about the potential for foreigners for buying into these options?
Bill Holter: I think foreigners are going to view that as possibly a cleaner market, because there’s been anecdotal evidence, there’s been evidence of guilt etc in many Western markets for rigging, many markets are rigged, there’s all kinds of manipulation and I would think that foreigners would: a be looking at that because it’s not using the dollar, and b. they might look at it as a cleaner, more free market.
Sputnik: The Chinese like to take a gamble; speculation is much more important and plays a bigger role on the Chinese market and some people were saying that Chinese traders when they got a hold of nickel on these markets they didn’t even know what they were trading, they were just buying steel reinforcement bars, iron ore and the prices went a bit crazy. Within six weeks they surpassed the benchmark futures on the LME (London Metal Exchange)…
Bill Holter: I don’t think this is so much of an oil story, I think this is a currency story, this is the big story here, every step forward for China is a step backwards for the United States, and another way to say that is the yuan, coming forward, is devoured as the dollar goes backwards, so I really don’t think this is an oil story from the standpoint of the oil market or oil volatility, I really believe it’s a foreign exchange story.
Sputnik: So what do you think, is this going to affect the price of the yuan going forward and the price of the dollar?
Bill Holter: I think it will obviously impact the price of the dollar, the dollar has been supported literally by the energy complex worldwide and this is obviously going to create less demand for the dollar which should create lower price, lower value and it will create more demand for the yuan simply because countries that want to settle in yuan will have to sell their currency and purchase yuan so I think this will strengthen the yuan.
Sputnik: On the other side of the coin, a stronger yuan is going to entail higher prices, and China is still a very big exporter, whereas the US, which wants to become more of an exporter, is going to see lower dollar prices, making their goods much more attractive to foreigners. It is going to be an interesting development I think, anyway, definitely something to look out for…
Bill Holter: Just one last thing; I think the tariffs, the trade war looks like it’s beginning, I don’t think this is any coincidence that this is happening now, I think it’s happening because of this oil settlement in yuan: it’s a threat to the US.