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China Oil Futures ?

April 5, 2018

Up until 2017, the US was the main importer of oil products across the world, however as the US domestic capacity has grown and consumption declined, their reliance on imports has diminished to the point where China has now become the largest importer of oil (see chart below)  

 

The issue for China is that since 1973, Saudi Arabia agreed to price its oil only in U.S. Dollars, and store their petrodollar revenue in U.S. Treasuries, thereby financing U.S. Debt. OPEC followed suite in 1975. In exchange, the US  would ensure the continuity of the ruling house of Saud, providing military protection and American weaponry. The strength of this agreement has been waning for years and the geopolitical games that are at play through the middle east all part of the mess that follows.

 

A lot has changed since 1975. China is now the biggest importer of oil and Russia is now the largest producer. Settling oil contracts in US Dollars to aid the financing of the US budget deficit, doesn't sit well with China, Russia and many other countries, so China has devised a new system to avoid using US Dollars.

 

 

The Shanghai International Energy Exchange,  which commenced trading last week, allows Chinese buyers to lock in oil prices and pay in local currency. The Exchange will also allow other foreign traders to invest tax free as the exchange is registered in Shanghai's free trade zone.

 

This move alone is unlikely to unseat the US Dollar's dominance in the world but every dollar diverted from the US system will have softening effect on demand for US dollars so it is worth understanding and keeping an eye on. It also puts into perspective the current tariff war between China and the US.

 

Over the next 20 years, the world's reliance on renewable energy will overtake the demand for oil which may produce a debt headache for the US like they've never seen before.

 

Needless to say, the world economy and the geopolitics that surround it is a complex beast.

 

 

 

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