Part A: Review (2018/12/24-2018/12/28)

From December 24, 2018 to December 28, 2018:the closing price of the main contract of crude oil futures of INE on Friday was 379.1 yuan/barrel, 10.5 yuan lower than the closing price of the last trading day of last week. The highest price for this week is 389.6 yuan/barrel, and the lowest point is 351.6 yuan/barrel.

This week (2018/12/24-2018/12/28), the total volume of the main contract was 2,393,850 lots, an increase of 740,848 lots from last week. After the close of trading this Friday, the open interest of the main contract was 43,220 lots, a decrease of 9,728 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. According to the "Measures for the Administration of Petroleum Prices" issued by the National Development and Reform Commission in 2016 ，which

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 December 14, and the price of gasoline and diesel was decreased by 125 yuan and 120 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 370 yuan and 355 yuan per ton respectively from 24:00 on December 28, 2018.

2. US crude flows resume trickle to China

Chinese buying interest for US crude is re-emerging after a months-long absence during a tariff dispute between the two countries.

A temporary truce called in the six-month-old US-China trade war will stall a 25pc tariff rate on $200bn/yr of US imports from China and maintain the current cost to Chinese refiners of importing US crude.

State-owned Chinese firms Petrochina and Sinochem have each placed a very large crude carrier (VLCC) on subjects to load US crude cargoes totaling up to 4mn bl in late December. The Arafura and Manifa would arrive in China in the first half of February, marking what would be the first fully loaded tankers to arrive with US crude since September.

Crude from the US is positioned to step in as a key alternative to Mideast Gulf supplies following a fresh Opec/non-Opec agreement to curtail global production by 1.2mn b/d in the first half of 2019. The output deal will likely elevate international crude prices relative to US benchmark West Texas Intermediate (WTI) to support the arbitrage for US exports.

After China became the top destination for US exports in early 2018, Chinese refineries backed out of the US Gulf coast market in late July following a US announcement earlier that month to deepen it's trade battle with China and impose a 25pc tariff on $50bn/yr of Chinese imports. That sparked threats from Beijing to reciprocate proportionately on US imports starting in August.

Large Chinese buyers like Unipec backed out of previously purchased US cargoes on expectations that the new tariffs could push delivered premiums $20/bl higher than competing Mideast and west African crudes. The sudden drop in demand led to a temporary surplus of waterborne light sweets at the US Gulf coast and fob WTI values falling to discounts to Argus WTI Houston — meaning waterborne prices would not even cover the transportation costs to the docks.

The US shipped no crude to China from August through October, according to the latest available monthly statistics by the US Census Bureau.

US producers have since restarted marketing cargoes to China, with flows now limited by traditional arbitrage economics. But demand remains limited in China on cheaper crude alternatives, pushing US crude to Europe and smaller Asia-Pacific countries instead for the near-term.

WTI crude sourced from Midland, Texas, averaged a roughly $1.25/bl discount to Nigerian Bonny Light crude and $1.75/bl discount to North Sea's Ekofisk on a delivered basis to China during the second half of 2018. This indicates a workable arbitrage from the US to China for cargoes loading in the first quarter of 2019.

But the US granted China a waiver to sanctions placed on Iranian oil imports, allowing China to continue importing from the Mideast country for the next six months. Lower Iranian crude prices spurred by curtailed demand amid the sanctions would compel the handful of Iran's remaining trade partners to boost purchases while they still can.

But official government selling prices for Iranian crude have yet to catch up with lower demand, with Iranian Light averaging a 90¢/bl premium to WTI on a delivered basis to China in the second half of 2019. Even if Iranian supply reached a discount to competing crudes, net-importer China will still need to supplement purchases with additional imports.

Part C: Transaction Summary

Since March 26th and up to December 28th closing, Shanghai crude oil futures’ cumulative trading volumes is 53. 02 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 25.48 trillion yuan (2018/3/26-2018/12/28), which is 44.92 times that of the cumulative amount of the first month of listing.

Average daily turnover of the main contract is 478,770 lots (2018/12/24- 2018/12/28), and average daily turnover of the main contract is 330,600 lots (2018/12/17-2018/12/21). Open interest of all the contracts of crude oil futures of INE also rised steadily, with 3,558 lots on March 26th and 65,434 lots after the closing of December 28th.

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