Oil & products house of the year, Asia: Bank of China International (BOCI)

Energy Risk Asia Awards 2020: China oil expertise helps bank’s energy team deliver 110% profit growth

Arther Fan, BOCI

Amid the unprecedented turbulence of 2020, the energy team at Bank of China International (BOCI) provided vital liquidity to the increasingly key Chinese oil markets and delivered a 110% increase in gross profits in the first eight months of the year, versus the same period in 2019.

Much of the team’s flow and market-making activities during this time came from two customised over-the-counter products based on Shanghai International Energy Exchange (INE) oil futures, according to Arthur Fan, global head of commodities at BOCI. The bank offered bilateral, Isda-based OTC transactions based on INE oil contract specifications and settled in either Chinese yuan (CNY) or US dollars (USD).

BOCI started offering these products in 2019, but 2020’s historically low oil prices caused a significant uptick in use by refiners to arbitrage with international benchmarks such as Brent and to lock in feedstock costs. Fan says these users typically hedged up to 12 months out.

Additionally, Chinese refiners are becoming more sophisticated, Fan says. In recent years, we have seen more diversification of hedging strategies by [Chinese] refiners, some of whom no longer simply want to lock in feedstock costs,” he says. “As Chinese export volumes have increased [in recent years], refiners have become more involved in crack hedging, for example.”

And as refiners’ understanding of domestic and international derivatives markets continues to grow, BOCI is poised to support the sector further. For example, before the end of this year, it hopes to add the option for physical delivery to its OTC products. It is currently completing back-office testing and waiting on approvals.

“Of course, clients can register in the Chinese domestic market and arrange delivery themselves, but there are a lot of procedures for those unfamiliar with Chinese regulations,” says Fan.

Indeed, Fan believes BOCI’s unique insight into Chinese commodity markets, gained over the 10 years since its 2010 launch, is crucial to its offering to both domestic and international clients. For example, its USD-denominated OTC oil product provides international clients with exposure to Chinese oil without currency risk.

“Many majors and other international organisations are interested in INE oil contracts, but are concerned about Chinese currency policy,” explains Fan. “We developed these OTC products to allow them to trade without having to place money into the domestic Chinese market.”

BOCI assumes the foreign exchange risk on behalf of these clients, using Hong Kong Exchange FX futures to manage its own exposure. “Because of BOCI’s in-depth knowledge of Chinese currency policy, we are well placed to provide liquidity in this way,” says Fan.

BOCI’s success in crude oil trading is underpinned by the bank’s sophisticated commodity research. The research team, which covers oil and base metals from London and Singapore, is currently trialling a range of machine learning (ML) applications to embed in its forecasting methodologies, which include a supply and demand model and a market sentiment indicator.

Xiao Fu, BOCI’s London-based head of commodities strategy, explains that ML will help track constantly changing commodity price drivers, especially in the Chinese market where government policy is becoming increasingly nuanced. “We don’t want to develop a model that will become stale,” she says.

More generally, the bank responded to this year’s market conditions by beefing up its risk management function. “Our principles are the same as previous years’ because we have a strong risk management culture,” Fan says. “But this year we improved monitoring and controls so everyone would be on the same page in terms of market moves.”

Enhanced intraday risk monitoring with more alerts tied to client portfolios and in-house positions has enabled BOCI to continue to build on its domestic expertise throughout 2020, providing access to an increasingly keen international and domestic trading audience.