Oil and products house of the year, Asia: Bank of China International

Energy Risk Asia Awards 2019: Chinese bank grows Asia oil and products volumes as other liquidity providers withdraw

Arthur-Fan
Arthur Fan, BOCI

Asian oil and products markets have been hard to navigate this year due to geopolitical tensions and global trade disputes causing extreme volatility and bouts of illiquidity.

But while many liquidity providers withdrew from the over-the-counter markets, Bank of China International (BOCI) stepped up its activities. This year its energy trading team gained market share in oil and products and posted a 30% increase in volume year on year.

With the majority of its clients having roots and businesses in China, BOCI has been well-placed to meet the growing demand for hedging from Chinese corporates. Despite the US-China trade war, energy flows into and out of China have grown this year.

“The physical influence of China is getting more intensive and we’re seeing more interest from Chinese clients in hedging international exposure,” says Sun Hui, the bank’s Singapore-based head of light distillates. “Having a lot of Chinese clients, this definitely gives us an edge over other market players.” 

The bank also attributes its success to prudent risk management. “Liquidity has been a big concern, so managing our own risk really carefully has been the key,” says Raymond Lau, the bank’s chief operating officer of Global Commodities.

The bank has devised and deployed various and strident strategies in order to manage its market and credit risk. “This has allowed the team to maximise the usage of credit lines with clients they have long-standing relationships with, and this is why we’ve been able to take on more business in this volatile environment when others have been dropping out,” Lau adds. 

One successful new initiative for the bank this year has been quoting and executing on a US dollar-denominated Chinese crude OTC contract based on the International Energy Exchange crude future. “This has been a key product offering for us this year, on top of the INE brokerage we started offering last year,” says Arthur Fan, BOCI’s global head of commodities.

The new contract allows clients to arbitrage between the Chinese oil price and US benchmark West Texas Intermediate or European benchmark Brent without foreign exchange risk, a desirable proposition given the recent volatility of the Chinese yuan to the US dollar, Fan notes.

Market-making this contract means BOCI must take on foreign exchange risk, which is then hedged by its Hong Kong-based currency traders.

Another major focus for the bank this year has been risk management around the upcoming International Maritime Organisation (IMO) rules. IMO 2020, which comes into effect in January, lowers the amount of sulphur allowed in shipping fuel to 0.5% from the current 3.5%.

Because the rules don’t specify the exact make-up of the fuel, a variety of blending methods could be used to produce compliant fuel, which makes it very hard to price. Adding to the complexity is the fact that shippers could choose to fit scrubbers to their boats that extract sulphur, allowing them to continue using high-sulphur fuel oil (HSFO).  

The physical influence of China is getting more intensive and we’re seeing more interest from Chinese clients in hedging international exposure. Having a lot of Chinese clients, this definitely gives us an edge over other market players

Sun Hui, BOCI

For firms wishing to hedge forward purchases or sales of low-sulphur fuel oil (LSFO), hedging at a differential to gasoil has become a popular strategy, especially as liquidity in HSFO is reducing. BOCI has brought its gasoil and fuel oil desks together, which allows it to offer a full range of hedging solutions to clients needing to manage their IMO 2020 risk. 

Meanwhile, volumes on the Shanghai Futures Exchange 380 centistokes HSFO contract, which was launched in July 2018, have been increasing steadily and are now at around two million lots per month.

Financial firms are taking advantage of the arbitrage between this contract and Singapore pricing and this is something that BOCI has been able to facilitate due to its presence in both onshore and offshore markets, says Marcus Chng, BOCI’s Singapore-based oil derivatives trader.

“We have a BOCI Shanghai affiliate providing execution services for these financial firms as well as for oil majors and trading houses,” he says. “Having that information flow and being able to quote prices when clients need to link two exchanges has been one of our strengths,” he adds.

As well as working across the entire barrel, BOCI is expanding its presence in the liquefied natural gas (LNG) market where increasing volumes of LNG are being priced against gas, rather than oil contracts. “We see it as a complement to our oil business,” says Fan. “One of our strategies is to provide as many products as possible so we can position ourselves as a total solution provider to our clients. Our move into LNG very much fits into this strategy. It is helping to enhance our stickiness towards clients.”

The move into LNG has helped drive up overall volumes significantly. By October this year, transaction volumes for the overall energy business were 30% higher than for the whole of 2018, says Fan. 

Looking ahead, the bank is optimistic on the future development of China’s markets and the impact of that on global trade. “We see the Shanghai fuel oil future as a starting point to China opening up more bilateral instruments or markets to international participants,” Fan says. “I think more contracts will be listed,” he adds, including possibly a much-anticipated Chinese gasoline future.

“We’re excited to be here, to see this momentum and to help our clients access these new markets and products,” says Fan.

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