Part A: Review (2018/11/26-2018/11/30)

From November 26, 2018 to November 30, 2018:the closing price of the main contract of crude oil futures of INE on Friday was 418.1 yuan/barrel, 14.9 yuan lower than the closing price of the last trading day of last week. The highest price for this week is 429 yuan/barrel, and the lowest point is 406.7 yuan/barrel.

This week (2018/11/26-2018/11/30), the total volume of the main contract was 2,451,536 lots, an increase of 549,518 lots from last week. After the close of trading this Friday, the open interest of the main contract was 36,168 lots, a decrease of 5,632 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. Price adjustment

International oil prices are an important indicator of the price adjustment of refined oil products in China. China's "Measures for the Administration of Petroleum Prices" stipulates that domestic gasoline and diesel prices will be adjusted every 10 working days according to changes in crude oil prices in the international market. The effective date of price adjustment is 24 o'clock on the release date of the price adjustment. When the price adjustment is less than 50 yuan per ton, no adjustment will be made, and it will be added or offset when it is included in the next price adjustment.

The last domestic refined oil price adjustment occurred at 24 o'clock on November 16, and the price of gasoline and diesel was decreased by 510 yuan and 490 yuan per ton respectively. According to the recent changes in oil prices in the international market, and according to the current formation mechanism of refined oil prices, domestic gasoline and diesel prices (standard products, the same below) decreased by 540 yuan and 520 yuan per ton respectively from 24:00 on November 30, 2018. The largest reduction in the year.

Graph: Maximum retail guide price: gasoline (2016/10/20-2018/11/30)

Graph: Maximum retail guide price: diesel (2016/10/20-2018/11/30)

2. Shandong premiums slide as concerns mount

Demand for crude in China's Shandong spot market is weakening, as product inventories build, pressuring downstream prices.

Spot premiums for ESPO Blend traded on a delivered ex-ship (des) basis to Shandong for delivery in January have fallen by nearly $2/bl from levels a month ago — steeper losses than those seen for the market's other core grades, Lula and Congolese Djeno. Refiners expect demand for crude to be higher in January than February, when many plants will shut for the week-long lunar new year public holidays. But ESPO Blend premiums are continuing to fall, while premiums for other grades are showing signs of stabilising. ESPO Blend, which is lighter than the other assessed grades, is more exposed to present weakness in China's gasoline markets.

Crude futures prices shot higher as the US deadline for a halt to purchases of Iranian crude approached last month, encouraging Shandong refiners to snap up cargoes. And strong product prices encouraged refiners to run hard. But neither October's Golden Week public holidays, nor this month's "double eleven" retail discount day, delivered refiners' hoped-for boost to fuel consumption.

Gasoline, in particular, is weak in China — as it is globally. Stocks are building, putting further pressure on product prices. Pre-tax gasoline prices in Shandong are now around $75.36/bl, compared with over $100/bl at the end of October, while diesel prices are $97.29/bl, compared with around $130/bl a month earlier.

Many exporters began butting up against the limits of this year's transport fuel export allowances in October-November. This limited China's ability to market fuel surpluses overseas and forced refiners to discount cargoes aggressively. The government has released, belatedly, supplementary export quotas for December. But refiners may struggle

to arrange shipments in time to make use of the new quotas, and additional cargoes sold into the export market may be regarded as distressed.

Gross product worth (GPW) margins from refining ESPO Blend in Shandong has fallen to around $11.70/bl compared with $23/bl in late-October. The Lula GPW margin is $6.90/bl and the Djeno GPW margin is $6/bl, Argus estimates. But the strength of fuel oil relative to other products is helping to support Djeno refining margins. Fuel oil is trading at a premium to Dubai crude in Singapore for the first time since 2012 — partly in response to falling exports to Asia-Pacific from Iran and Venezuela.

Some 780,000 b/d of crude has traded on a spot basis at differentials to Ice Brent this month in Shandong, compared with 920,000 b/d in October, Argus surveys indicate. Tumbling crude futures prices are encouraging many refiners to defer spot purchases, in the hope of being able to lock in lower prices. The market is trading Djeno for delivery in February, following the release of west African January-loading programmes, while the Lula market is shortly to shift to March-delivery cargoes.

Shandong crude receipts may have hit their highest level since March this month, of around 3.6mn b/d. But refiners are increasingly concerned about the outlook for oil demand, as US trade pressures begin to bite, and are cutting throughputs. The 13 independent refineries surveyed by Argus trimmed their weighted average utilisation rate by 4 percentage points to 78pc in November.

3. Asia-Pacific crude: January Bunga Kekwa trades higher

Medium sweet grades continued to strengthen amid firm refining margins for middle distillates.

Vietnam's state-owned PVOil sold 300,000 bl of Bunga Kekwa loading on 13-19 January at a premium of $3.50-4/bl to North Sea Dated, traders said. Last month, November- loading Bunga Kekwa traded at a premium of $2.50-3/bl to Dated.

Most January volumes were now committed, but there were late tenders for crude and condensate, which traders were looking to as a gauge for market direction. Bids for Malaysian state-owned Petronas' tenders to sell Muda condensate and Bertam crude were valid to 28 November.

Brunei released its retroactive October official selling prices (OSP), increasing the Seria Light OSP by $2.75/bl to $84.10/bl. Brunei also set the October OSP for Champion at $84.10/bl. Brunei set the provisional November Seria Light and Champion OSPs at $73/bl.

Delivered China

Activity in Shandong was largely muted as the market waited for the outcome of spot tenders by Huifeng and Haike.

Spot values for Brazilian Lula crude were steady, with offers for February-delivery cargoes at around $2.10-2.20/bl over April Ice Brent. The last deal for a Brazilian grade in Shandong was a February-delivery Sapinhoa cargo which traded at a premium of $2.10/bl last week.

ESPO Blend crude was still offered at a premium of $2.40-2.50/bl for January-delivery. Medium sweet Djeno crude from Congo Brazzaville for February-delivery was offered at premiums in a $1.70-1.80/bl range.

Demand for February-delivery cargoes has slumped as some Shandong refiners cut run rates and opted to work off high product stocks instead of buying spot cargoes.

Since March 26th and up to November 30th closing, Shanghai crude oil futures’ cumulative trading volumes is 42. 91 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 21.35 trillion yuan (2018/3/26-2018/11/30), which is 37.65 times that of the cumulative amount of the first month of listing.

Average daily turnover of the main contract is 490,307 lots (2018/11/26- 2018/11/30), and average daily turnover of the main contract is 380,404 lots (2018/11/19-2018/11/23).

Open interest of all the contracts of crude oil futures of INE also rised steadily, with 3,558 lots on March 26th and 66,736 lots after the closing of November 30th.

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