The market looks forward to the launch of Shanghai crude oil options

Crude oil options will be listed for trading on the Shanghai International Energy Exchange, a subsidiary of the Shanghai Futures Exchange (INE) on June 21. As a long-awaited derivative in the market, what impact will the listing of crude oil options have on the market? In what ways can relevant companies use crude oil options to optimize their price risk management? In the Beijing special event of offline training on crude oil options held by the previous period of energy recently, relevant people gave a detailed introduction to these issues.

Fast-growing markets need more derivatives

According to industry insiders, the upcoming crude oil options can not only increase the investment targets available in the market, but also fully meet the needs of enterprises to avoid risks.

In recent years, the domestic petrochemical industry has developed rapidly. At present, China is not only an important manufacturing center and supply chain hub in the world, but also a world petroleum and chemical power, accounting for 40% of the global market share. However, as a country where crude oil consumption is highly dependent on imports, China's petrochemical industry profits are highly correlated with raw material prices. As the prices of relevant overseas derivatives cannot reflect the fundamentals of supply and demand in China or even in the Asia-Pacific region, China launched crude oil futures in 2018 to help relevant companies develop healthy development by providing more effective risk management tools.

According to the relevant person in charge, after the listing of Shanghai crude oil futures, domestic entities have obtained better hedging tools, and the international market has also paid more attention to the demands of the Chinese market. Through rational use of Shanghai crude oil futures, some traders and refineries can truly feel the dividends brought about by the development of the financial market while expanding their scale in an orderly manner. Because of this, the market is looking forward to the listing of crude oil options.

In this regard, another person in charge of the industry also holds the same view. In his view, the reason why crude oil options will be launched at this time is mainly because the external environment is already available.

It is understood that the trading subject of Shanghai crude oil options is Shanghai crude oil futures. Since the listing of crude oil futures, the market has been operating steadily, the scale has been steadily expanded, the investor structure has been continuously optimized, and its functions have been gradually brought into play. Data show that in 2020, Shanghai crude oil futures have a total of 41,585,800 lots traded, with a total turnover of 11.96 trillion yuan; the average daily position of crude oil futures by general legal persons has risen to about 42%. According to FIA statistics, since 2018, Shanghai's crude oil futures trading volume has ranked third in the world, second only to CME's WTI crude oil futures and ICE's Brent crude oil futures.

Under the arbitrage mechanism of the global crude oil market, the main contract price of Shanghai crude oil futures is highly linked with the foreign market, which can effectively reflect the fundamentals of the domestic and even Northeast Asian markets. This provides a good foundation for the later launch and development of Shanghai crude oil options.

The listing of crude oil options will improve the hedging system of domestic entities and attract more investors to participate in derivatives transactions. In terms of contract design, crude oil options are closer to the demands of current entities, and the trading unit is 1,000 barrels per lot just like crude oil futures. In addition, in terms of exercise methods, the use of more flexible American options is the same as overseas crude oil options. When the market is favorable or there is actual need, option buyers can exercise their options at any time to obtain futures positions, which is more flexible. In the option market with relatively limited liquidity in the initial stage of listing, the American option model also provides a new way for investors to exit.

Enriching corporate hedging strategies, optimizing market resource allocation

Analysts believe that the listing of crude oil options is of greater significance to corporate risk management. Option gains and losses have non-linear characteristics, which for option hedging companies can not only play a role in hedging risks, but also obtain potential benefits from price increases or declines. Option buyers only need to pay premium, while futures hedging must pay a certain percentage of margin. Therefore, companies that use option buyer hedging do not need to worry about the risk of margin call, especially when the price fluctuates sharply, the company's capital is less occupied.

Through the combination of options, the combination of options and futures, or even the combination of options, futures, and spot, relevant institutions can create more diverse investment strategies and risk aversion forms. This can not only meet the needs of enterprises under different market conditions, but also completely change the single model of risk aversion that is either long or short.

Normally, most oil-related companies in mature overseas markets use option hedging, such as airlines, international oil companies, etc., to hedge the risk of oil price fluctuations through various option portfolio products. Compared with futures, options can form different hedging combinations according to the different risk management needs of enterprises, so they will be more flexible.

In addition, after the last-period energy and crude oil options are listed, relevant companies can also innovate their current procurement and sales strategies. For example, adding an option portfolio to a traditional spot contract can upgrade the traditional form of trade to a more advantageous trade with rights, helping companies purchase spot at a lower price and sell finished products at a higher price. This can improve the profitability and operating efficiency of the enterprise to a certain extent.

In fact, option-containing trade is also one of the key trade models explored by the energy and chemical industry in the past two years. According to a head of derivatives, in the past few years, as the price of the spot market has become more and more transparent, some companies have realized the importance of the combination of futures and cash and began to integrate the futures market. As an important way to purchase raw materials or sell products, it actively locks in profits through a combination of futures and cash.

Under such circumstances, options have gradually entered the field of vision of more people, becoming one of the tools for companies to avoid risks and lock in profits. Especially in the past two years, many companies are facing risks brought by violent price fluctuations when the market environment has undergone tremendous changes. Considering that some companies lack futures expertise or are limited by internal policies and cannot directly participate in derivatives trading, option-containing trading effectively combines options application scenarios with spot trading. This not only helps companies reduce the risk of price fluctuations that may be faced in their daily operations, but also brings additional profit margins for companies. This is an optimization for enterprise management and market resource allocation. In view of this, the era of option-containing trade has come, and this type of trade will become bigger and bigger with the gradual improvement of market awareness.

The launch of crude oil on-the-spot options will help build and improve China's oil and gas industry's multi-level derivatives system, better meet the needs of industry participants for value preservation, and will also promote the development of energy-based trade in the energy and chemical industry. On- exchange and over-the-counter options complement each other. Although over-the-counter options are more flexible and can provide tailor-made services for enterprises, from the perspective of risk transfer, more companies still need to hedge their risks in the on-exchange market.

It is understood that in order to better serve the real economy and help the recovery of the air transport industry, INE has recently passed three companies including Donghai Airlines Co., Ltd., ZTE Corporation and Shanghai Aviation Printing Co., Ltd. through the chairman of the China Air Transport Association. Deliberated at office meetings and became a member of AVIC.

Analysts believe that the 2020 epidemic is undoubtedly a black swan event that has occurred in decades for the global aviation industry. Although the domestic epidemic was quickly brought under control, the complexity of the global epidemic has caused the aviation industry as a whole to be in a state of malaise. Domestic airlines have suffered huge losses in the first three quarters of 2020 due to insufficient occupancy rates. Although the cost side has little effect on the plight of the aviation industry, with the gradual recovery of crude oil prices, the control of fuel costs is also an important measure to deal with the epidemic.

Considering that the purpose of the establishment of the AVIC is to integrate domestic aviation resources and maximize the benefits of the entire aviation industry chain. At this time, energy joined the AVIC in the last period, essentially to cooperate with it, to maximize the shortcomings of important links in the industry chain, that is, to control fuel costs and avoid operating risks caused by violent market fluctuations.

Other analysts believe that this reflects the current increasing demand for the futures market in the aviation industry, and futures will also enter the industry to better serve the real economy. Crude oil and aviation kerosene prices are highly correlated. The latter period of energy will surely help more airlines understand hedging and other hedging methods, and promote China's financial and entities to go hand in hand and develop together. At the same time, energy in the previous period can also fully understand the demands of the industry through exchanges, and prepare for the listing of more energy varieties in the future.