Date: Thurs, 16th April 2020
Author: By Bloomberg
In China’s largest oil firm, a research expert concludes that the nation’s drillers should follow the hedging strategies of Mexico and shale companies in the U.S, which use financial derivatives to form a protection against plunging oil prices.
According to Dai Jiaquan, director of the oil market research department at China National Petroleum Corp.’s Economics & Technology Research Institute, majority of China’s oil production remains unhedged. As a result, it causes the stability of the sector to be exposed to fluctuations from the global market. In a panel interview published in CNPC-owned China Petroleum Daily, he expressed that China enterprises are encouraged to use derivatives to ensure stable returns on the crude they sell. The process is easier with yuan- denominated futures on Shanghai International Energy Exchange.
“Now that Shanghai crude oil futures are listed and functioning well, it is necessary to make full use of financial means to hedge the risk of price fluctuations,” he said.
This year, oil prices are down by half, so far. The finances of China’s state oil firms are strained by this and has led them to decisions in cutting back expenditure.
Despite the billions of dollars annually invested in old, high-cost fields to sustain the country’s reliance on overseas oil in check, China has still progressed to emerge as the world’s largest importer.
Bai Ming, deputy director of the Ministry of Commerce’s international market research institute, explained in the same panel interview that China government should take this opportunity of the lower prices from the derivatives to build its strategic reserves.
“If we want to expand our reserves, on the one hand, we can buy real oil, and on the other hand, we must purchase futures to lock in low-cost sources in advance,” he said.
The state asset regulator tightened rules on commodities derivatives trading, capping hedging at 80% of physical volume, down from 90% in January and reiterated that derivatives trading should be solely for the purpose of hedging, instead of speculation.
In comparison, Mexico’s hedging program includes using put options to set a price floor, has shielded it during every downturn Over the last 20 years. It generated $5.1 billion when prices crashed in 2009 during the global financial crisis. It also received $6.4 billion in 2015 and another $2.7 billion in 2016 as Saudi Arabia flooded the market.
Essentially, all of China’s output is consumed domestically. The country produced about 3.8 million barrels a day of crude oil in 2018 in estimation, as compared to almost 2.1 million daily by Mexico, according to data from the BP Statistical Review of World Energy. In the past, Mexico hedged around 250 million barrels, or about 680,000 barrels a day, which is on par with nearly all its net oil exports.
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