Crude oil prices find support in trade talks and Mideast tensions

Oil prices fall but still above $70 as US trade dispute with China looms

Brent crude futures were at $70.24 per barrel down 21 cents or 0.3 percent. Image source Reuters

XM investment analyst Andreas Georgiou said that if the EIA's weekly report shows a smaller than expected rise in inventories, or a drawdown, prices could be supported.

Since Shanghai crude oil futures were launched on March 26, it would have been profitable to buy the spread between Brent and Shanghai crudes, which has risen from $1.6 per barrel on Monday to $4.6 on Wednesday, while shorting the Shanghai premium over WTI, which has narrowed from $3.1 a barrel on Monday to just 30 cents on Wednesday.

China has launched yuan-dominated crude oil futures, a major step in Beijing's years-long push to win greater sway over oil.

The oil futures with delivery in September began the stock exchange session at a price of 440 CNY per barrel, and by noon almost 15,000 contracts changed their owners.

September contracts of the two major U.S. dollar-based oil benchmarks, Brent in London and West Texas Intermediate in NY, traded near US$68.29 and US$64 a barrel respectively.

In Asia, Shanghai crude oil futures debuted strongly in terms of volume as investors and commodity merchants bought into the world's newest financial oil trading instrument.

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The early involvement of big worldwide traders was a morale boost to the fledging market, but state oil majors like PetroChina and Sinopec are expected to provide a significant amount of liquidity in the long-term. "Rightly so, China would want to play a more active role in influencing the price of crude oil".

To attract more participation, China plans to waive income taxes for overseas individuals and institutions. Domestic firms, including Unipec, Chinaoil, Cnooc, and Sinochem, as well as independent refiner Shandong Huifeng Petrochemical, also joined trading, which started on the Shanghai International Energy Exchange on Monday.

The skeptics say that capital controls, regulatory risks, and state intervention in other Chinese securities have made investors distrustful about the possibility that Shanghai futures will become a regional factor for pricing. The global benchmark traded at a $5.06 premium to WTI.

Similar obstacles have kept foreign investors as bit players in the country's giant mainland stock and bond markets.

The yuan-denominated contract will also help Beijing's efforts to internationalise the nation's currency, said Woodmac's Gupta. "For the moment it is looking like both WTI and Brent are stalling", said Greg McKenna, chief market strategist at futures brokerage AxiTrader.

One way of tempering the froth has been to limit physical delivery space for the oil barrels, as well as set storage costs that are double the rate elsewhere.

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