Oil Market on Verge of Historic Move

Traders are preparing themselves for a historic event over the coming months as China readies for the launch of crude oil futures priced in RMB. The contract will be convertible to gold, meaning that traders will be able to settle crude oil purchases in RMB Yuan and then convert the RMB Yuan into gold on exchanges in Hong Kong and Tokyo. This will be the first time that traders will be able to settle crude oil futures trade without needing USD’s and marks the beginning of the shift away from USD as the global reserve currency.

RMB Yuan Crude Oil Futures, Awaiting Final Regulatory Approval

China has been developing RMB Yuan based currency exchange operations over several years and has been preparing to launch crude oil futures, but the plan was delayed due to a severe crash in Chinese equities over summer 2015 which wiped 40% of companies’ value. However, speaking to Caixin last week, Jiang Yan who is CEO of the Shanghai Futures Exchange said that the crude oil futures offering is under review and awaiting final regulatory approval.

34 Global Central Banks Agree to Bi-Lateral Currency Swap

The Brookings Institute reports that 34 global Central Banks have opted into bi-lateral currency swap agreements with the PBOC as of Q3 2016, including major oil producing nations. These agreements mean that these countries will be able to deal directly with China as well as other crude oil exporters using RMB Yuan to settle transactions which can then be converted into physical gold. This will be a significant draw for countries who wish to avoid using US Dollars which have been used to quote and trade OPEC Crude Oil since 1973.

Petrodollars Under Threat

These petrodollars, as they are known, have been the corner-stone of the US economy funding a large part of the US government’s deficit. The introduction of a new “petroyuan”, backed by gold, will be a clear threat to the US economic position and a firm move towards removing the USD as the global reserve currency.

Venezuela Begins Quoting Crude Oil in US Futures

In an important move towards achieving this change, Venezuela, the country with the largest global oil reserves, began quoting crude oil prices in RMB Yuan. The Venezuelan Oil Ministry released a statement saying: “This format is the result of the announcement made on September 7th by the President (Nicolas Maduro)… that Venezuela will implement new strategies to free the country from the tyranny of the dollar,”. The move has largely been interpreted as a show of strength against the US economy following the imposition of sanctions by the US government on the country. Speaking to reporters last week Venezuelan finance minister Ramon Lobo said that “The market is dominated by transactions with the U.S: dollar, and we must develop other ways to conduct international transactions.”

According to the Venezuelan government, the sanctions imposed by the US have made debt servicing and payments for imports extremely difficult as US banks are refusing to accept public funds which have also negatively impacted the state-run oil company PDVSA.

Venezuela has long threatened to make such a move away from quoting crude oil in USD and had recently reported that it would favor the Euro. Venezuela’s choice of using RMB Yuan is seen as a strategic move as China is unlikely to join the US in its quest to force Mauro to rewrite the constitution and abandon his office. Furthermore, Venezuela has borrowed around $60 billion from China in exchange for discounted oil with the details of the deal not fully disclosed.  On Friday, the price quoted by Venezuela was 306.26 yuan per barrel (roughly $46.76).