China's New LSFO Contract Jumps in Debut Trade

China’s new low-sulphur fuel oil (LSFO) futures contract made strong gains in its debut trade on Monday, rising as much as 16.7% on the Shanghai International Energy Exchange (INE).

The front-month January contract, with a listing price of 2,368 yuan per tonne, later pared gains to close 9.8% higher at 2,599 yuan ($367.35) per tonne at the close of afternoon trade.

The contract saw open interest of 24,859 lots and trading volumes of 130,439 lots.

The launch of the contract with sulphur content lower than 0.5% comes after an International Maritime Organization (IMO) ruling which bans ships from using high sulphur content fuel oil this year unless equipped with exhaust scrubbers.

The contract could help boost China’s ambition to build a regional bunkering hub in its port of Zhoushan to vie for the multi-billion dollar ship fuel market dominated by Singapore.

Prices for LSFO futures jumped as the market felt its listing price, set by the Shanghai exchange, was undervalued and came below Zhoushan’s spot prices and Singapore’s 0.5% marine fuel prices, said Jin Xiao, chief analyst for energy and petrochemicals at Orient Futures research unit.

“Considering that the long-term curve of Singapore’s low-sulphur is in a contango structure, we think it is more reasonable for LSFO prices to have a premium to Zhoushan spot prices,” he said.

Contango is a situation where the futures price of a commodity is higher than the spot price.

Open to international investors, the LSFO contract is China’s fifth internationalized one following the opening up of crude oil, TSR 20 rubber, iron ore and purified terephthalic acid futures to foreign participants.

“LSFO prices will see limited declines mainly due to the fact that the most serious impact of the coronavirus epidemic on the economy has ended, demand will gradually recover,” Jin added.

A Shanghai-based trader who traded the contract said whether or not LSFO’s prices could sustain would depend on the demand and supply of the marine fuel.

“In the short term, it will depend on crude oil, which is expected to trend slightly higher.”

($1 = 7.0750 Chinese yuan renminbi)

(Reporting by Muyu Xu in Beijing and Emily Chow; Editing by Tom Hogue and Amy Caren Daniel)

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