What Is Petro Yuan?

In a bid to combat the longstanding hegemony of the US dollar, China has introduced a new standardised futures contract available to trade on the Shanghai International Energy Exchange. The People's Republic is optimistic that the arrival of Petro Yuan, which relies on crude oil as an underlying asset, will usher in a new era for the international energy industry. It's the first time the market has seen futures contracts priced in Chinese yuan, with analysts predicting it could pose a serious threat to the enduring dominance of the US dollar.

China aims for global benchmark

Currently, China is the world's biggest oil importer, purchasing around nine million barrels a day. The introduction of Petro Yuan is part of a plan to reshape the energy industry and use local currency to trade one of the world's most coveted commodities. Eventually, China hopes to cement its yuan-priced oil futures contract as a global crude benchmark that stands alongside Brent and WTI.  

"The goal is for China to establish an Asian benchmark that will reflect Chinese consumption and more broadly Asian demand patterns", explains Michal Meidan, Asia analyst for market consulting services group, Energy Aspects. "For now, it doesn't mean many changes. Oil is still going to trade in the US dollar, but increasingly over time, there will be more transactions ... but this is not a gamechanger, yet."

Critics slam Petro Yuan as a "fantasy"

China is expecting to receive its first Petro Yuan oil delivery in September, with five companies on track to deliver 600,000 barrels of Middle Eastern crude to local buyers in the People's Republic. Unipec will be supplying one of the biggest deliveries, with roughly 200,000 barrels of Iraqi grade Basra Light bound for storage tanks on an island near Zhejiang. CNPC Fuel Oil and Zhenhua Oil are also onboard, with plans to deliver 100,000 barrels of Basra Light to a Zhanjiang storage farm operated CNPC Fuel Oil.

Not everyone is as buoyant, with critics flagging Chinese storage costs as a major challenge for delivering Petro Yuan oil futures contracts. Others have slammed the Petro Yuan as a "fantasy" that will fail to gain traction and quickly fizzle out, leaving the US petrodollar to continue its reign.

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