Part A: Review (2018/11/19-2018/11/23)

From November 19, 2018 to November 23, 2018:the closing price of the main contract of crude oil futures of INE on Friday was 433 yuan/barrel, 33.7 yuan lower than the closing price of the last trading day of last week. The highest price for this week is 480.9 yuan/barrel, and the lowest point is 428.9 yuan/barrel.

This week (2018/11/19-2018/11/23), the total volume of the main contract was 1,902,018 lots, an increase of 337,598 lots from last week. After the close of trading this Friday, the open interest of the main contract was 41,800 lots, an increase of 17,864 lots from the last trading day of last week.

Notes: The main contract refers to the futures contract with the maximum open interest.

Part B: Market Dynamics

1. Notice-Circular on Price Limit Update for Crude Oil Futures Contracts SC1812 and SC1901

Shanghai International Energy Exchange notifies the price limit update for crude oil futures contracts SC1812 and SC1901 as follows:

1. The price limit for SC1812 will be updated from ±5% to ±10% since November 28, 2018(i.e. the continuous trading session on the night of November 27).

2. The price limit for SC1901 will be updated from ±5% to ±8% since December 3, 2018(i.e. the continuous trading session on the night of November 30).

3. The price limit for SC1901 will be updated from ±8% to ±10% since the second trading day prior to the last trading day (i.e. the continuous trading session of the second trading day prior to the last trading day)

Shanghai International Energy Exchange

November 22, 2018

2. Sinopec wins extra jet fuel export quota

China's biggest refiner state-controlled Sinopec has been awarded the right to export more jet fuel this year.

The commerce ministry (MoC) has granted Sinopec an extra 70,000t (552,000 bl) jet fuel export quota under third-party processing terms, a company official said. The new award takes the firm's total jet fuel export quota for this year to 236,000 b/d, up by 5pc from its quota of 225,000 b/d in 2017.

Sinopec now accounts for almost 70pc of the total jet fuel export quotas granted by the MoC in 2018. Chinese refiners have the right to export 339,000 b/d of the fuel this year, up by 12.3pc from 2017.

The MoC in October allowed Sinopec to replace a previously-awarded 350,000t (2.96mn bl) gasoline export quota with a 350,000t (2.76mn bl) jet fuel quota, further boosting its exports of the fuel.

The quotas enable Sinopec to find overseas outlets for its rising jet fuel output. The refiner has been raising jet fuel yields in particular this year as it looks to maximise margins. Sinopec's jet-kerosine output increased by 9pc from a year earlier to 628,000 b/d January- September, accounting for almost 61pc of the country's total output in the period.

Sinopec's 470,000 b/d Maoming refinery, its biggest jet fuel exporter, produced 71,000 b/d of the aviation fuel in January-September, up by 14.4pc from a year earlier. Jet fuel accounts for about 95pc of China's total jet-kerosine output.

China exported 82mn bl (300,000 b/d) of jet fuel in January-September, up 15pc from a year earlier, customs data show. This equivalent to 66pc of the total jet fuel export quota of 124mn bl awarded for this year.

3. Import

(1) Aramco heralds turnaround in its China fortunes

Saudi Arabia hopes to raise its crude sales to China by two-fifths next year, primarily by boosting sales to new refineries.

State-owned Saudi Aramco says it has signed five new crude oil supply agreements with Chinese customers that will help take total 2019 China crude supply agreement volumes to 1.67mn b/d. "Already in the fourth quarter of 2018, Saudi Aramco's crude exports to China are marking a new record of 1.6-1.7mn b/d," Aramco says. "The new 2019 crude oil supply agreement volumes will ensure that Saudi Aramco's crude sales to China stay at these levels, well ahead of all other major suppliers," it adds. Chinese imports of Saudi crude averaged 1mn b/d in January-September while imports from Russia — its largest supplier — averaged 1.4mn b/d. China arranged to buy more from a range of producers in October-December as the prospect of US sanctions on Iran threatened imports of 650,000 b/d. But Saudi Arabia was the only major producer with significant spare production capacity and boosted supply by as much as 550,000 b/d.

The details of the potential Saudi increase remain unclear. Private sector refiner Hengli's 400,000 b/d Dalian Changxing plant is due to open this month, while the 400,000 b/d Rongsheng ZPC plant will open around the end of this year or early 2019. Hengli and ZPC are expected to take as much as 320,000 b/d of Saudi crude next year compared with 30,000 b/d in 2018, accounting for the largest share of the potential Saudi increase. Aramco aims to buy a 9pc stake in ZPC and is likely to provide a baseload 40pc of supply for both plants. Aramco's long-standing customers — state-controlled Sinopec, PetroChina, Norinco, Sinochem, and CNOOC — may also take more next year. But whether they do so depends on the state of the market, to a greater degree than it does for the private sector firms. Many state-controlled firms are large crude producers in their own right, and boast multiple sources of alternative imports, such as Latin America, Russia and west Africa. Sinopec boosted purchases from Colombia, Iraq and Russia ahead of the reimposition of US sanctions on Iran in November.

Washington's decision to grant China a waiver to continue buying 360,000 b/d from Iran this month is likely to have left China oversupplied with crude in the short term — especially as domestic clean products prices are falling and refiners are cutting runs. Any move by Washington to enforce a cut to zero on Iranian exports when US waivers come up for renewal in May would force Chinese state-controlled firms to buy more from Aramco. But Chinese GDP growth is slowing, curbing demand for refined products. But the opening of new refineries may increase China's overall oil demand by 560,000 b/d next year from 420,000 b/d growth this year.

Saudi Arabia has lost market share in China in recent years as independent refiners became the main engine of demand growth. These independent refiners have tended to favour sweeter grades. Saudi Arabia's market share was further undermined this year following a row over pricing with Sinopec trading arm Unipec. Re-establishing itself as China's main crude supplier would help cement demand for Saudi sour crude ahead of the International Maritime Organisation's cuts to sulphur content in marine fuel from 2020. That is likely to destroy high-sulphur fuel oil (HSFO) demand in the shipping sector, and pressure sour crude prices. Weakening sour crude prices will give newer Chinese refineries —such as the 260,000 b/d PetroChina Anning, 400,000 b/d Hengli Changxing and 400,000 b/d Rongsheng ZPC plants — a cost advantage over their peers. Many new Chinese plants were designed to run Saudi Arab Medium with a sulphur content of 2.4pc, and produce little fuel oil.

(2)Urals flows to China increased in October

Combined shipments of Russian Urals crude from the Baltic Sea and Black Sea to China rose in October, when buying interest was encouraged by the prospect of sanctions on Iran and by further declines in Venezuelan output.

At least 125,000 b/d of October-loaded Baltic Sea Urals will be delivered to China. Very large crude carriers (VLCCs) New Talisman and Athenian Victory took on around 540,000t in ship-to-ship (STS) transfers offshore Southwold, UK and are on route to Ningbo on behalf of state-controlled Sinopec's trading-arm Unipec. They are scheduled to arrive on 8 and 31 December, respectively. The prior month around 120,000 b/d made similar transfers.

A further 63,000 b/d of October Urals could join those tankers east of Suez. The MT Lucky Trader has taken on 270,000t of October Urals off Southwold — where cargoes are assembled for bulk voyages to Asia-Pacific — although it is yet to declare its destination.

Exports of Black Sea Urals to Asia-Pacific were stable in October at around 200,000 b/d on six 140,000t cargoes, all delivered to Chinese ports. Around 168,000 b/d was delivered to China in September, and one 140,000t cargo (34,000 b/d) sailed for India in that month.

Eastbound long-haul flows in October may have been encouraged by a contraction in the Brent-Dubai EFS spread, which would have helped offset a sharp rise in freight rates. The spread averaged $1.85/bl in August, when October was the front-month Brent contract, compared with $2.54/bl in July.

Chinese refiners may have increased Urals purchases in October ahead of the reimposition of US sanctions on Iran's oil sector on 5 November. China imported around 645,000 b/d of October-loading Iranian crude ahead of the deadline, Argus tracking shows, up by around 2pc on the month. It is unclear how much of this will be refined — a fair portion is headed for northern China, where Iran's state-owned NIOC may have storage facilities.

Urals supply may have provided Chinese refiners with an answer to dwindling Venezuelan supplies. Just 189,000 b/d of Venezuelan crude arrived in China in September, down from 403,000 b/d a month earlier, customs data show. Venezuelan production fell to just 1.17mn b/d in October, 40,000 b/d below September and 690,000 b/d lower than October 2017, Argus estimates.

Chinese appetite for crude — particularly sour crude, given robust fuel oil margins in Asia-Pacific — was particularly high in October, when apparent demand rose to an all- time high of 13.31mn b/d. Urals was in plentiful supply to meet this. Exports of Baltic Sea and Black Sea Urals, and of Siberian Light, were scheduled at just over 2mn b/d, up by almost 13pc on the month.

Demand for Urals in Asia-Pacific has carried over into November-loading supplies. The Aframax Seaqueen — which loaded a 100,000t Baltic Urals cargo from Primorsk on 7 November — performed an STS transfer with the VLCC Ridgebury Purpose at Skaw, offshore Denmark. Shipping reports indicate Unipec fixed that tanker. In the Black Sea the Eurodignity has set sail for New Mangalore, India, after loading a 140,000t Urals cargo on 5 November.

Part C: Transaction Summary

Since March 26th and up to November 16th closing, Shanghai crude oil futures’ cumulative trading volumes is 38. 07 million lots, and the cumulative trading volumes of the first month of listing (2018/3/26-2018/4/25) is 1.33 million lots. The cumulative amount of transaction is 19.24 trillion yuan (2018/3/26-2018/11/16), which is 33.93 times that of the cumulative amount of the first month of listing. Average daily turnover of 239,424 lots (2018/3/26-2018/11/16), and average daily turnover of 235,240 lots (2018/3/26-2018/11/9), as can be seen from the volume, the activity of the INE crude oil futures contract has improved. Open interest also rised steadily, with 3,558 lots on March 26th and 69,288 lots after the closing of November 16th.

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