Crude Oil Futures Trading Handbook 2020 Edition

This Handbook is for reference use only. To receive the

latest information, please contact the relevant divisions
of the Shanghai International Energy Exchange (INE) or
visit the website of INE at http://www.ine.cn.
Contents
Crude Oil: Introduction /01
General Properties and Composition /01
Main Performance Indicators /02
Crude Oil Classification /05
Crude Oil Refining /08
Petroleum Products and Main Applications /09

Overview of the Domestic and International Oil Markets /11

International Oil Market /12
Overview of China’s Crude Oil Market /23

Components and Influencers of Crude Oil Futures Price /30

Components of Crude Oil Futures Price /30
Influencers of Crude Oil Futures Price /33
Costs of Crude Oil Imported to Bonded Zones /34

Hedging and Arbitrage with Crude Oil Futures /35

Hedging with Crude Oil Futures /35
Arbitrage with Crude Oil Futures /38

Guide to Crude Oil Futures Trading /41

Modes of Access /41
Market Access for Domestic Members and Clients /42
Market Access for Overseas Clients and Brokers /46
Other Procedures and Key Rules /60

Standard Contract /82

Contract Specification /82
Appendix for the Standard Contract /83
Deliverable Grades, Quality Specification and Price Differentials /84

APPENDIX /85
 Crude Oil: Introduction

General Properties and Composition

Crude oil is a mixture of liquid hydrocarbons and their other natural forms
directly extracted from underground reservoirs. It is usually a flowing or semi-
flowing viscous liquid.

Both the properties and appearance of crude oil vary with the region from which
it is produced. In terms of color, most crude varieties are black, while some
are dark grey, dark green, dark brown, or even reddish brown, light yellow, or
colorless; in terms of specific gravity, most varieties fall between 0.8 and 0.98.
Crude oil also tends to be smelly due to the sulfur compounds it contains.

Crude oil is mainly composed of carbon, hydrogen, sulfur, nitrogen, oxygen, and
trace elements. Carbon and hydrogen are the main constituents, accounting
for approximately 96–99% of crude oil by weight, with the rest accounting for
no more than 1–4%. All these elements exist in crude oil in the form of organic
compounds, most of which are hydrocarbons including alkanes, cycloalkanes,
aromatics, and hydrocarbon mixtures having the molecular structures of all
three. Crude oil doesn’t normally contain alkenes or alkynes, but the former
does exist in some products from the second stage of refining. Aside
from hydrocarbons, crude oil also has a considerable amount of non-
hydrocarbon compounds, mainly including compounds containing sulfur,
oxygen, nitrogen, as well as gelatinous and asphaltic substances (resins
and asphaltenes), which altogether representing 10–20%
of crude oil by mass.

1
As a complex, multi-component substance, crude oil has a very wide boiling
range from room temperature to above 500 °C. While each component has its
own characteristics, it is unnecessary to break down crude oil into individual
components to derive useful petroleum products. In general, simply separating
crude oil by fractional distillation should be enough for research and processing
purposes. The term “fractional distillation” means “cutting” crude oil into
“fractions” by the different boiling points of its components. Such fractions are
often referred to as gasoline, kerosene, diesel, lubricating oil, or some other
petroleum products, but they are not petroleum products in the strict sense
of the term because the latter must meet certain quality requirements, while
the former is just intermediate or semi-finished products that require further
processing before becoming true petroleum products.

Main Performance Indicators

The main performance indicators of crude oil and petroleum products include,
among others, density, viscosity, solidifying point, asphaltene and resin content,
sulfur content, wax content, wax appearance point (cloud point), water content,
total acid number (TAN), flash point, specific heat, and explosive limit. For crude
oil, the physical properties are key indicators in determining its quality (and that
of the resulting products) and controlling the refining process.

Density
The density of crude oil refers to its mass per unit volume. In general, lower
density crude oil yields a higher ratio of light oil.

Because rising temperature increases a petroleum product’s volume and thus

reduces its density, density is only meaningful alongside a temperature. China’s
national standard (GB/T 1884) prescribes that the density at 20 °C, represented
by ρ20, is to be the standard density of petroleum and liquid petroleum products
in China.

2
 The specific gravity of a petroleum product refers to the ratio of its density to the
density of water at a specified temperature, and is generally denoted as d4t for
petroleum product at t °C. In China and Eastern Europe, the commonly used
20°C
specific gravity is d4°C , whereas in America and other European countries it’s
60°F
d60°F i.e., the ratio of the density of petroleum product at 60 °F to that of water at
60 °F (approx. 15.6 °C).

Countries in this latter group often use a specific gravity index known as “API
gravity at 60 °F” (“API gravity” for short) to indicate the standard density of
petroleum products. API gravity is the opposite of density, in that a larger API
gravity means a lower density. At present, API gravity is one of the primary
factors in the global pricing of crude oil. Higher API gravity means a lighter crude
oil and commands a higher price.
60°F
API gravity = (141.5 / d60°F ) − 131.5,

where degrees Fahrenheit (°F) = 32 + degrees Celsius (°C) × 1.8

Viscosity
The viscosity of crude oil can be expressed and measured in a number of ways
which often vary across countries. China uses kinematic viscosity and the
Engler scale; countries including the U.S. and Great Britain use the Saybolt and
Redwood scales; most countries in Western Europe, including Germany, adopt
the same standards as China. The International Standardization Organization
(ISO) has named kinematic viscosity to be the universal standard, a brief
overview for which is given below.

The kinematic viscosity of crude oil refers to the ratio of its dynamic viscosity to
its density.

Dynamic viscosity is measured in pascal second (Pa * s) in the SI system and

poise (P) or centipoise (cP) in the CGS system, interconvertible as follows:

1 Pa * s = 10 P = 103 cP

3
Kinematic viscosity, therefore, has a unit of m2/s or mm2/s in SI and stokes (St)
or centistokes (cSt, or 1/100 St) in CGS. For example, “180 cSt fuel oil” means
fuel oil with a kinematic viscosity of 180 cSt. The two systems of units are
interconvertible as follows:

1 m2/s = 106 mm2/s = 106 cSt

Viscosity measures the resistance of crude oil to flow, and will decrease with
rising temperature. Viscous, high pour-point crude oil and gas oil should be
heated during shipment to maintain fluidity.

Low Temperature Performance

A petroleum product’s low temperature performance is a vital quality indicator
that directly affects how the product should be shipped, stored, and used.
This performance is measured by a number of metrics, including cloud point,
crystallization point, freezing point, solidifying point, pour point, and cold filter
plugging point, with solidifying point and pour point being the most important.

Solidifying point refers to the highest temperature that a petroleum product

under prescribed thermal and shearing conditions can maintain a flowing surface
when cooled. Pour point refers to the lowest temperature that a petroleum
product can maintain its fluidity under prescribed laboratory conditions. The
solidifying point of crude oil ranges from -50 °C to 35 °C depending on its
composition. In particular, crude oil with a high proportion of light components
has a lower solidifying point; conversely, crude oil with a high proportion of
heavy components (especially paraffin) has a higher solidifying point.

Combustion Performance
Most petroleum products are flammable and explosive. Indicators like flash
point, fire point, and auto-ignition temperature define the level of fire hazard –
with lower values indicate a more easily combustible product – and are essential
for ensuring personal and property safety during the storage and shipment of
crude oil and petroleum products.

4
 Sulfur Content
Nearly all crude oil and petroleum products contain some concentration of sulfur.
Sulfur compounds negatively affect the refining process and the application of
petroleum products; for instance, they corrode metallic equipment and pipelines,
cause catalyst poisoning, and lower product quality. This is becoming a more
prominent problem in recent years: as China’s economic boom has catapulted
car ownership to record levels, SO2, SO3, and other pollutants from the
combustion of sulfur-containing fuel can cause serious harm to the environment.
Hence, it is essential to limit the sulfur content in petroleum products; in
particular, crude oil should undergo desulfurization before further processing.

Solubility
Crude oil is insoluble in water but can be combined with it to form an emulsion;
crude oil is soluble in organic solvents like benzene, essence, ether, chloroform
and carbon tetrachloride, and partially soluble in alcohol.

Crude Oil Classification

Crude oil can generally be classified by industrial, chemical, physical, or

geological standards, with industrial (commodity) and chemical standards being
the most common choice.

Industrial (Commodity) Standard

This standard encompasses a wide range of classification schemes, including
by density, sulfur content, nitrogen content, wax content, and resin content.
Internationally, crude oil is commonly priced based on its classification as
defined by its API gravity and sulfur content.

5
 Crude Oil Classification by API Gravity

Density at 15 °C Density at 20 °C
Classification API Gravity
(g/cm3) (g/cm3)

Light > 34° < 0.855 < 0.851

Medium 20°–34° 0.855–0.934 0.851–0.930

Heavy 10°–20° 0.934–0.999 0.930–0.996

Extra-Heavy < 10° > 0.999 > 0.996

Source: Storage and Shipment of Petroleum Materials, China University of Petroleum Press

According to the internationally accepted classification standards, the API of

ultralight crude oil is API≥50, the API of light crude oil is 35≤API < 50, the API
of medium crude oil is 26≤API < 35, and the API of heavy crude oil is 10≤API <
26. In practice, these numerical ranges are not strictly observed and may vary
from country to country and from company to company, as other factors such as
marker crude would also often play a role.

In China, Daqing, Shengli, Liaohe, and Dagang oilfields produce medium crude
oil; oilfields at Gudao and Urho district yield heavy crude oil; and Shuguang
Zone 1 of the Liaohe oilfields and certain oil wells at Gudao produce extra-
heavy crude oil.

Crude Oil Classification by Other Industrial Parameters

Parameter Sulfur Content Nitrogen Content

Category Low Medium High Low Medium High
% by Mass < 0.5 0.5–2 >2 < 0.25 – > 0.25
Parameter Wax Content Resin Content
Category Low Medium High Low Medium High
% by Mass 0.5–2.5 2.5–10 > 10 <5 5–15 > 15
Source: Storage and Shipment of Petroleum Materials, China University of Petroleum Press

6
 Chemical Standard
Chemical classification schemes are based on the chemical composition of
crude oil, often focusing on some of the physical properties of crude oil that are
directly related to its chemical composition.

1.By characterization factor

The characterization factor, or the K factor, is a function of the specific gravity

and boiling point of crude oil and remains fairly constant for crude oils of similar
chemical compositions. This property makes it suitable as a classification
parameter.

Crude Oil Classification by Characterization Factor

K Factor Category
> 12.1 Paraffinic
11.5–12.1 Intermediate
< 11.5 Naphthenic
Source: Storage and Shipment of Petroleum Materials, China University of Petroleum Press

2.By key fraction properties

This kind of classification is based on the specific gravities of two key fractions
of crude oil. The two key fractions are obtained at 250–275°C and 395–425°C,
respectively, from crude oil kept in a special apparatus and distilled under
specified conditions.

Crude Oil Classification by Key Fractions

Key Fraction First Key Fraction Second Key Fraction

ρ20 < 0.8210 g/cm3 ρ20 < 0.8723 g/cm3
Paraffinic
API gravity > 40 API gravity > 30
ρ20 = 0.8210–0.8562 g/cm3 ρ20 = 0.8723–0.9305 g/cm3
Intermediate
API gravity = 33–40 API gravity = 20–30
ρ20 > 0.8562 g/cm3 ρ20 > 0.9305 g/cm3
Naphthenic
API gravity < 33 API gravity < 20
Source: Storage and Shipment of Petroleum Materials, China University of Petroleum Press

7
 Crude Oil Refining

Crude oil refining is generally divided into primary refining and secondary
refining.

Primary refining is a process during which crude oil is separated by distillation

into fractions of various weights, taking advantage of the fact that different crude
oil components have different boiling points. This process, commonly referred
to as distillation, includes such stages as pretreatment, atmospheric distillation,
and vacuum distillation. The products of primary refining include (1) light
distillates, referring to distillates with a boiling point below about 370 °C, such
as gasoline, kerosene, and diesel; (2) heavy distillates, referring to distillates
with a boiling point between about 370 °C and 540 °C, such as gas oil, various
lubricating oils, and cracking feedstock; and (3) residues (atmospheric residue,
vacuum residue).

Secondary refining refers to further processing of products from primary refining.

During this process, heavy distillates and residues are cracked by various
means, including catalytic cracking, hydrocracking, and coking, to produce
light oils. Catalytic reforming and petroleum product refining are also part of
secondary refining.

8
 Petroleum Products and Main Applications

Petroleum products are the general name of all kinds of commodities directly
produced by petroleum or some part of petroleum as raw materials, generally
excluding petrochemical products synthesized from petroleum as raw materials,
which are mainly divided into six categories: fuels, lubricants, bitumen, paraffin
wax, petroleum coke, solvents, and industrial chemicals.

Products in the “fuels” category include engine fuels such as gasoline, diesel
and jet fuel (aviation kerosene), as well as kerosene and fuel oils. In China,
about 80% of the petroleum products are petroleum fuels, of which 60% are
various types of engine fuels. Lubricants are the best represented in terms of
variety (over 100), but only account for 5% of the total production. Solvents and
industrial chemicals, including cracking feedstock used for producing ethylene,
petroleum aromatic hydrocarbons, and various solvent oils, account for around
10% of the total production, while bitumen, paraffin wax, and petroleum coke
account for the remaining 5%–6%.

9
Crude Oil Refining Process

10
 Overview of the Domestic
and International Oil Markets

The oil industry has been around for more than 150 years, but true free trade in
the international oil market did not begin until the late 1960s.

In the first 70 years of the 20th century, the price of oil remained fairly stable
in spite of major global conflicts. This is in part due to the control of Western
multinational oil companies over the vast majority of oil resources in the Middle
East, and the oil prices by extension, through “concession agreements.” The
establishment of the Organization of Petroleum Exporting Countries (OPEC) in
1960 marked the gradual shift of Western control of oil prices to OPEC. In the
1970s, the control of OPEC over most of the world’s oil supply was powerfully
demonstrated in the two oil crises involving Saudi Arabia and Iran, when oil
prices were pushed to record levels. Starting from the 1980s, however, non-
OPEC countries gradually overtook OPEC countries in oil production, causing a
global oversupply and the oil prices to plummet in a “reverse oil crisis.” This new
market landscape signaled that the world’s oil prices would no longer be dictated
by any single organization, but rather by a multitude of factors influenced by
market forces.

The growing volatility in international oil prices in recent years has prompted a
strong need for risk mitigation tools. The international crude oil futures market
germinated to fill that void, and has been developing rapidly since the 1990s.

11
 International Oil Market

Global Distribution of Oil Reserves

The overall distribution of the world's oil resources is extremely unbalanced:
from the eastern and western hemispheres, about three quarters are
concentrated in the eastern hemisphere, while the western hemisphere
accounts for one quarter; from the northern and southern hemispheres, mainly
concentrated in the northern hemisphere; from the perspective of latitude
distribution, it is mainly concentrated in the 20°~40° and 50°~70° latitude bands.
In particular, the Persian Gulf and the Gulf of Mexico – two major oil-producing
regions – and oil fields in North Africa are all situated in the 20°–40° N band,
which holds 51.3% of the global oil reserves, while the 50° N–70° N band
encompasses key oilfields in the North Sea, the Volga region, Siberia, and Gulf
of Alaska.

As new exploration technologies develop and the demand for crude oil
increases, proven oil reserves in countries and regions around the world have
also been on the rise.

Data from recent years confirm this trend. According to the BP Statistical Review
of World Energy 2019, global proven reserves increased from 1.49 trillion
barrels in 2008 to 1.73 trillion barrels in 2018, representing an average annual
growth rate of 1.58% in the past decade, a sizeable gain.

A geographical breakdown of proven oil reserves reveals significant variance

from region to region. The Middle East holds 840 billion barrels, or 48.3% of
the global total; Europe and Eurasia hold 160 billion barrels (9.2%); Central
and South America 330 billion barrels (18.8%); Africa 130 billion barrels (7.2%);
North America 240 billion barrels (13.7%); and the Asia-Pacific region only
50 billion barrels (2.8%). Central and South America have the world’s fastest
growing reserves, at an average rate of 6.6% per annum over the past decade.

12
 As for the country, by the end of 2018, Venezuela's total proven reserves
reached 303.3 billion barrels, accounting for 17.5% of the world's reserves. It
has the world's largest heavy oil deposit, the Orinoco heavy oil belt. Next are
Saudi Arabia and Canada at 17.2% and 9.7%, respectively. Of special note
are the oil sands in Northern Alberta, Canada. They are unconventional crude
oil deposits but make up more than 96.4% of the country’s total. Iran and Iraq
complete the top-five list. China has 25.9 billion barrels of proven reserves, or
1.5% of the world’s total. Recent advances in the extraction technologies for
unconventional oil and gas, especially as exemplified by the exploration and
exploitation of shale oil/gas and tight oil/gas in the United States, may once
again change the global dynamics of energy supply.

Distribution of Proven Reserves in 1998, 2008 and 2018 (billion barrels)

Source: BP Statistical Review of World Energy 2019

13
 2018 Proven Oil Reserves by Country (billion barrels)

Source: BP Statistical Review of World Energy 2019

Global Oil Production and Consumption

Global production and distribution

Global oil production and consumption have generally been rising year-on-year.
The global production level reached 94.72 million barrels per day (bpd) in 2018,
an increase of 2.4% from 92.50 million bpd in 2017, 14% from 83.07 million
bpd in 2008, and 29.8% from 73 million bpd in 1998. Between 1999 and 2018,
the world’s total oil production increased by 1.6% per annum on average, with
a notable 2.0% dip between 2008 and 2009, from 82.89 million bpd to 81.22
million bpd, due to the global economic crisis.

Geographically, the most active oil production regions are the Middle East,
North America, Europe and Commonwealth of Independent States, contributing
31.76 million bpd, 22.59 million bpd, and 18 million bpd in 2018, respectively,
representing 33.5%, 23.8%, and 19% of the global production.

Country-wise, in 2018, the United States, Saudi Arabia, Russia, Iran, Iraq,
Canada, and the United Arab Emirates had a combined daily output of 57.52
million barrels, accounting for 60.7% of the global production.

14
 Global Consumption

The five biggest oil consuming countries in 2018 were the United States, China,
India, Japan, and Saudi Arabia, which went through a collective 46.71 million
bpd, or 46.8% of the global total. The United States was the world’s largest
oil consumer at 20.46 million bpd (20.5% of the global total); while the fastest
growing oil consumer is China, whose daily consumption increased from 7.91
million barrels in 2008 to 13.53 million barrels in 2018 – an annual average
growth rate of 7.1% – leapfrogging other countries in the 10-year span to the
second spot.

Global Production and Consumption of Oil (barrel/day)

Source: BP Statistical Review of World Energy 2019

It can be seen from the figure that global oil consumption is consistently greater
than the production in the listed years. This supply-demand gap is made
sustainable largely by inventory adjustments.

15
In 2018, global oil consumption rose by a respectable 1.5% or 1.44 million
bpd, lower than the 1.67 million bpd in 2017. Weak demand from OECD
countries was the main reason. Their consumption only rose by 0.27 million
bpd, or 0.6%, much lower than the global average of nearly 1.2% in the past
decade. The consumption in the U.S. grew by 0.5 million bpd, or 2.5%. Europe
reduced by 0.16 million bpd, or 0.9%. Japan's daily oil consumption fell by 0.12
million barrels or 3.1%. Among the non-OECD countries, net oil importers saw
significant growth in consumption. For example, China's appetite for oil rose
by 0.69 million bpd (+5.3%), helping it to retain the title as the country with the
greatest demand growth; India averaged an increase of 0.29 million bpd (+5.9%),
surpassing Japan as the world's third largest oil consumer. However, these
sizeable gains were partially offset by the slow growth of oil-producers among
the non-OECD countries, resulting in an aggregate consumption growth rate of
2.3% among the group, lower than the decade average of 3.2%.

Growth in global oil production surpassed that of global oil consumption and
reached 2.22 million bpd in 2018, a year-on-year increase of 2.4%. Affected
by sanctions, production in Iraq and Venezuela dropped sharply, offsetting the
growth in Iraq and Saudi Arabia. The overall production level of OPEC countries
was therefore down by 0.34 million bpd, or 0.8%, to 39.34 million bpd, the
biggest fall since 2014. The daily production level of non-OPEC countries rose
by 2.55 million bpd, or 4.8%, from the record set in 2015. At an increase of 2.18
million bpd, or 16.6%, the U.S. led this group in production growth.

16
 Major International Crude Oil Futures Exchanges
There are over ten exchanges around the world that provide crude oil futures.
The most influential international crude oil futures exchanges today are the New
York Mercantile Exchange (NYMEX), a subsidiary of the Chicago Mercantile
Exchange Group (CME), and the Intercontinental Exchange (ICE). West Texas
Intermediate (WTI) from NYMEX and Brent Crude from ICE are the benchmarks
for U.S. and European crude oil contracts, respectively. Oman crude oil futures
of Dubai Mercantile Exchange (DME) is also an important benchmark contract.
After two years of rapid development, Shanghai crude oil futures has become
the third most traded oil benchmark in the world.

Crude oil contracts listed elsewhere are: the WTI and Brent crude oil futures of
the Multi Commodity Exchange of India (MCX); Middle East crude oil futures
of Tokyo Commodity Exchange (TOCOM), Brent crude oil futures of Moscow
Exchange; and Urals crude oil futures of St. Petersburg International Mercantile
Exchange (SPIMEX), WTI crude oil futures from the Singapore Mercantile
Exchange (SMX); WTI crude oil futures from the Rosario Futures Exchange
(ROFX) in Argentina; crude oil futures listed on the Johannesburg Stock
Exchange (JSE) in South Africa. In addition, CME launched the Houston WTI
futures contract in the fourth quarter of 2018 based on the needs of refineries,
traders and consumers.

According to the latest data from the Futures Industry Association (FIA) in 2019,
the top crude oil futures contracts in terms of trading volumes are Brent crude
oil futures contract from the Moscow Exchange, WTI crude oil futures from
NYMEX, Brent crude oil futures contract from ICE, mini crude oil futures and
crude oil futures contracts from Multi Commodity Exchange (MCX), WTI crude
oil futures contracts from ICE, and Shanghai crude oil futures contracts from the
Shanghai International Energy Exchange (INE).

17
 Trading Volume of Major Global Crude Oil Contracts in 2019 (Unit: Lot)

Exchange Contract Trading Volume

Crude Oil Physical (CL) 291,465,320

Mini Crude Oil (QM) 5,470,936

Chicago Mercantile
Brent Crude Oil-Last Day (BZ) 25,616,925
Exchange Group (CME)

WTI Huston Crude Oil Futures (HCL) 183,204

Crude Oil(WS) 16,884

ICE Brent Crude 221,331,490

Intercontinental
Exchange (ICE)
ICE WTI Crude 53,597,867

Dubai Mercantile
Oman 1,442,981
Exchange (DME)
Tokyo Commodity
Crude Oil 2,679,766
Exchange (TOCOM)

Crude Oil Mini Futures 135,579,941

Multi Commodity
Exchange of India (MCX)
Crude Oil 60,194,186

Moscow Exchange Brent 616,575,153

Brent Crude Oil 3,142

Johannesburg Stock
Exchange (JSE)
Crude Oil 20

Rosario Futures
WTI Crude 534,945
Exchange (ROFX)
Source: FIA and Official Websites of Exchanges

18
19
Comparison of Major Global Crude Oil Contracts 2020

INE (SC) ICE Brent (B) CME WTI (CL) DME Oman (OQD)
Medium sour crude oil with
API gravity of 32 and sulfur
BFOET (Brent,
Underlying content of 1.5% by weight.
Forties, Oseberg, WTI / DSW 1 Oman Crude Oil
Product Deliverable grades and
Ekofisk, Troll)
premiums / discounts will be
separately set by INE

Contract Size 1,000 barrels 1,000 barrels 1,000 barrels 1,000 barrels

Price U.S. Dollars and U.S. Dollars and Cents per U.S. Dollars and Cents per
Yuan per barrel
Quotation Cents per barrel barrel barrel

Minimum Price
¥0.1 per barrel $0.01 per barrel $0.01 per barrel $0.01 per barrel
Fluctuation

Settlement
Physical delivery Cash settlement Physical delivery Physical delivery
Method

Delivery at INE-designated
Delivery
delivery storage facilities in EFP FOB at Pipeline FOB at the Loading Port
Method / Type
bonded zones

Settlement The daily volume-weighted VWAP from 19:28 to VWAP from 14:28 to 14:30 VWAP from 16:25 to 16:30
Price average price (VWAP) 19:30 London time Eastern time (US) Singapore time

1
WTI/DSW shall meet the grade and quality specifications on sulfur, API, viscosity, RVP, basic sediment, pour point, micro method carbon residue, TAN,
total acid number, nickel, vanadium and HTSD
 INE (SC) ICE Brent (B) CME WTI (CL) DME Oman (OQD)
Trading in the current contract
month ceases on the third
The last business
business day prior to the twenty-
day of the second
fifth calendar day of the month
month preceding Trading ceases on the last
The last trading day of preceding the delivery month.
Last Trading the contract month trading day of the second
the month preceding the If the twenty-fifth calendar day
Day (e.g., March contract month preceding the delivery
contract month of the month is a non-business
expires on the last month
day, trading ceases on the third
business day of
business day prior to the last
January)
business day preceding the
twenty-fifth calendar day
Delivery matching and
Five consecutive business Generally cash- From the first calendar day to
Delivery tanker selection in the month
days after the last trading settled through EFP the last calendar day of the
Period preceding the contract month;
day 2 before expiry delivery month
delivery in contract month
Introduce Dynamic Price Limit
Functionality: The upper and
Interval price limits
lower price fluctuation limit will
functionality serving
be calculated by utilize the
as circuit breaker to
dynamic variant in continuously
reduce short-term
rolling 60-minute look-back
Within ±4% from the price fluctuations.
period. When the price exceeds
Price Limits settlement price of the Although effective on None
the dynamic price fluctuation
previous day every trading day, it
limits, then a two minutes
can be only triggered
trading halt will commence. After
in a very short time
the fourth triggering event on a
under extreme price
trading day, there shall be no
fluctuations.
further special price fluctuation
limits.

2
Because China’s crude oil futures are delivered through standard warrants, “five consecutive business days after the last trading day” refers to the period
for the transfer of warrants, while the actual loading of goods (either onto a vessel or into a storage facility) would have been completed before then.

20
21
INE (SC) ICE Brent (B) CME WTI (CL) DME Oman (OQD)
Maintenance margin: $2,325/lot-
Minimum $4,650/lot;
Maintenance Margin: Maintenance margin: $3,600/
Trading 5% of contract value Margin requirements for far
$2,250−$4,940/lot lot-$5,000/lot
Margin month contracts gradually
decrease
Monthly contracts listed for the
current year and the next 10 Consecutive months are listed
calendar years and 2 additional for the current year and the
Monthly contracts of recent
contract months. List monthly next five years. A new calendar
Contract twelve (12) consecutive Up to 96 consecutive
contracts for a new calendar year will be added following
Months months followed by eight (8) months
year and 2 additional contract the termination of trading in
quarterly contracts.
months following the termination the December contract of the
of trading in the December current year
contract of the current year.
CME Globex: 
Sunday - Friday, 6:00 p.m. -
5:00 p.m. (5:00 p.m. - 4:00
New York Time:
p.m. Chicago Time/CT) with
20:00−18:00 (+1 day) Electronic trading is open from
a 60-minute break each day
Beijing Time 9:00−11:30, London Time: 16:00 CST/CDT Sundays and
beginning at 5:00 p.m. (4:00
13:30−15:00; continuous 01:00−23:00 from 16:45 CST/CDT Monday
Trading Hours p.m. CT)
trading hours are separately Singapore Time: to Thursday and closes at
CME ClearPort: Sunday - Friday
set by INE 08:00–06:00 (+1 day) 16:00 CST/CDT the next day,
6:00 p.m. - 5:00 p.m. (5:00 p.m.
Sunday Open Monday to Friday
- 4:00 p.m. Chicago Time/CT)
London:22:00
with a 60-minute break each
day beginning at 5:00 p.m. (4:00
p.m. CT)
Source: Shanghai International Energy Exchange, CME, ICE and DME, current as of April 2020
International Crude Oil Prices
From the beginning of 2019 to mid-May, OPEC production reduction agreement
and US sanctions on Iran provided support for the rebound in international
crude oil futures prices. From late May to early June, the risk of a “hard Brexit”
in the UK increased significantly, triggering market concerns about the Euro
area economy and plunging international crude oil futures prices. In August,
Trump announced that he would levy another 10% additional tariffs on China ’s
300 billion export products on September 1. The trade dispute between the two
countries entered a stage of heating up. Crude oil prices fell and reached the
lowest level during the year. On September 16, the Saudi oilfield was attacked,
causing its crude oil output to lose nearly half in the short term, resulting in
a sharp rise in crude oil prices. Since then, with the recovery of Saudi crude
oil production capacity and the profit-taking operations of some investors,
international oil prices have continued to fall. From mid-October to the end of
the year, the Brexit agreement progressed smoothly. OPEC decided to expand
production reductions. Sino-US trade negotiations had made positive progress.
Iran’s expanded its nuclear activities. All these events had led to fluctuating
oil prices. The average annual prices of Brent and WTI crude oil futures were
57.04 USD/bbl and 64.16 USD/bbl respectively, which decreased by 12.11%
and 10.50% year-on-year. At the end of the year, oil prices rose by 31.2%
and 20.2% respectively from their lowest at the beginning of the year, further
narrowing the spread between the two. At the beginning of 2020, due to the
coronavirus outbroke in China and the rest of the countries around the world,
oil prices dropped sharply as a result of the reduction in market expectation of
the global economy and oil demand.Besides, OPEC+ meeting failed to agree on
production cuts, and later on Saudi Arabia launched oil price war, causing price
slump further.

22
 2010−2020 International Crude Oil Futures Prices (USD/barrel)

Source: Reuters

Overview of China’s Crude Oil Market

Distribution of Oil Reserves

China’s oil resources are concentrated in the Bohai Bay, Songliao, Tarim,
Ordos, Junggar, Pearl River Mouth, Qaidam, and East China Sea Shelf basins.
Together they boast 17.2 billion metric tons of recoverable reserves, or 81.13%
of the country’s total.

23
In terms of depth distribution, 80% of China’s recoverable reserves are located
in the shallow (< 2000 m) and medium-deep (2000–3500 m) range, with a
comparatively small proportion situated at the deep (3500–4500 m) and ultra-
deep (> 4500 m) range. In terms of geographical distribution, 76% are found in
plains, shallow seas, Gobi and other deserts. In terms of quality, 63% are light
oil, 28% are tight oil, and 9% are heavy oil.

In China, CNPC (China National Petroleum Corporation), Sinopec (China

Petrochemical Corporation) and CNOOC (China National Offshore Oil
Corporation) operate a number of large domestic oil and gas fields. In particular,
CNPC owns the Daqing, Changqing, Yanchang, Xinjiang, Liaohe, Jilin, Tarim
oil fields; Sinopec owns the Shengli, Zhongyuan, and Jianghan oil elds; and
CNOOC owns the Bohai oil elds, among others.

24
 Production and Consumption
China’s crude oil production is heavily concentrated in the northern regions
(northeast, northwest, and north China), Shandong, and the Bohai Bay.
Consumption spreads across the whole country, but centers around the Bohai
Bay, Yangtze River Delta, and Pearl River Delta.

China’s biggest oil consumer is its industrial sector, followed by transportation,

agricultural, commercial, and residential sectors. Industrial oil consumption has
continuously accounted for at least 50% of total consumption; transportation
comes in second, accounting for about 25%.

According to BP Statistical Review of World Energy 2019, from 2004 to 2018

China’s crude oil production rose from 174 million to 189 million metric tons,
achieving an average annual growth of 0.57%, and making China the world’s
eighth largest oil producer. China is now also the world’s second largest oil
consumer, with its consumption level increasing at an average annual rate of
6.30% over the same period, from 323 million to 628 million metric tons per
annum.According to the General Administration of Customs,crude oil imports
totaled 506 million tons in 2019.

Oil Production and Consumption in China(100 million metric tons)

Source: BP Statistical Review of World Energy 2019

25
Imports and Exports
China became a net importer of petroleum products in 1993, and a net importer
of crude oil in 1996. Since then, surging domestic demand has steadily driven
up the country’s crude oil imports.

According to statistics from China Customs, from 2004 to 2019, China’s crude
oil imports rose from 123 million tons to 506 million tons, with an average annual
increase of 19.46%. At present, China has become the world ’s largest importer
of crude oil. In 2019, the top ten crude oil import countries were: Saudi Arabia,
Russia, Iraq, Angola, Brazil, Oman, Kuwait, United Arab Emirates, Iran, and
Venezuela. Among them, crude oil imports from the Middle East increased by
3.58% month-on-month to 245 million tons, accounting for 48.46% of the total
imports.

Prior to the 1990s, crude oil exports were an important channel for China’s
export earnings. With the increase of China’s economic demand for oil, crude
oil exports have gradually decreased since the mid-1990s. At present, a
small amount of crude oil exports are mainly resulting from long-term trade
agreements with relevant countries. According to the BP Statistical Review of
World Energy 2019, China exported 4.64 million tons of crude oil in 2018, a
year-on-year decrease of 4.53%.

China's Monthly Crude Oil Imports 2018-2019(10,000 metric tons)

Source: General Administration of Customs

26
 China's Crude Oil Imports in 2019

Source: General Administration of Customs

Oil Refining
Refining capacity

SCI survey indicates that, as of the end of 2019, China’s 203 domestic refineries
(including independent refineries) have a total crude oil refining capacity of 900
million metric tons per year, up 2.61% from the year before. This means China
represents 17.8% of the global refining capacity, second only to the United
States.

Excluding independent refineries (i.e., refineries without a steady source of

crude oil and steady capacity utilization rate), the primary refining capacity of
China’s major refineries is 594 million metric tons per year, rising year-on-year
by 2.24% and accounting for 11.7% of the global total. By the end of 2019, the
independent refineries in China had a combined primary refining capacity of
311 million metric tons per year, up 13.32% and representing 34.36% of China’s
total refining capacity.

27
 Primary Refining Capacity in China 2012–2019 ( 100 million metric tons/year)

Source: Sublime China Information(SCI)

Major Domestic Refineries

As of the end of 2019, the combined primary refining capability of refineries with
capacity above 10 million metric tons a year is 460 million metric tons, or 50.8%
of the total capacity of major refineries in China.

28
 China’s Top Ten Refineries with Primary Refining Capacity Above 10 Million Metric Tons/
Year (million metric tons/year)

Primary % of
Rank Refinery Owner Refining Region Domestic
Capacity Total
Zhenhai Refining & Chemical
1 Sinopec 23.00 Zhejiang 4.09%
Company
Dalian Petrochemical
2 CNPC 20.50 Liaoning 3.64%
Company
Jinling Petrochemical
3 Sinopec 18.00 Jiangsu 3.20%
Company
Maoming Petrochemical
4 Sinopec 18.00 Guangdong 3.20%
Company
Dushanzi Petrochemical
5 CNPC 16.00 Xinjiang 2.84%
Company
Guangzhou Petrochemical
6 Sinopec 15.70 Guangdong 2.79%
Company

7 Qilu Petrochemical Company Sinopec 14.00 Shandong 2.49%

Shanghai Petrochemical Co.,

8 Sinopec 14.00 Shanghai 2.49%
Ltd.
Fujian Refining &
9 Sinopec 14.00 Fujian 2.49%
Petrochemical Co., Ltd.
Sinopec Beijing Yanshan
10 Sinopec 13.50 Beijing 2.40%
Company
Source: SCI

Production of Petroleum Products in China in 2019

Source: SCI

29
Components and Influencers of
Crude Oil Futures Price

Components of Crude Oil Futures Price

Like many other futures products, the price of crude oil futures has two main
components: (1) costs, profits, and taxes related to the production process; and
(2) costs, circulation expenses, and expected profits from futures trading. These
can be further classified into five sub-components for ease of understanding:

1.Production Costs

As is the case with other commodities, the production of crude oil incurs costs
such as equipment expenses, wages and salaries, and local taxes. These
expenditures form the “foundation” of the oil price. However, it is important to
note the two distinctive features in how the production of oil, or more precisely
the production costs of crude oil, relates to the price of crude oil futures. First, in
international markets, the price of crude oil futures is only weakly influenced by
the production costs. This is due to the unevenness in the global distribution of
oil resources and a strong baseline demand, which give rise to what is known
in economics as a high “differential rent,” meaning the international oil price
is generally aligned with the price of higher-cost crudes or alternative energy
sources. In fact, crude oil’s production costs, which vary wildly depending on the
deposit characteristics, oil qualities, and extraction techniques, are far less than
its selling price.

30
 Second, the exploration, exploitation, and other pre-production costs are linked
to the market price only in the sense that they are a factor in the decision-
making process that determines the output level of the oilfield, and therefore
the market supply. Early stage investment warrants careful consideration
because it is a major part of the production cost of crude oil, which can be
broadly categorized into geological survey costs, construction costs for drilling
equipment and ground facilities, and extraction expenses. In practice, early
stage expenses are often more important than extraction expenses in the
production cost equation.

2.Product Profits

A business has many operating objectives – economic, social, etc. The

economic objective is what makes it an enterprise and at the center of that is
profit. The price of crude oil futures includes profit from the production process,
and because the formation of crude oil requires specific geological conditions,
which results in extremely uneven distribution of oil resources around the world,
this profit is much higher than in conventional industries, and more characteristic
of those of monopolistic industries. According to economic principles, in a
monopoly, the price of a product is no longer directly determined by or correlated
to the cost of production or the intrinsic value of the product, but rather by the
demand and purchasing power of the buyers. While the crude oil market is not
fully monopolistic, the bulk of crude resources and output have long been under
the control of a supplier group consisting of transnational oil companies, OPEC
countries, and non-OPEC oil-producing countries, who have an interest to keep
the oil prices at a high but not unbearable level to reap the maximum profit.
This dynamic explains why, despite the vast differences in the production cost
of crude oil around the world, almost all oilfields are put into operation: simply
stated, a higher production cost only causes a minor dent to the bottom line, but
nothing to make the whole enterprise unprofitable. This expected profit level is
also reflected in the price of crude oil futures.

31
3.Trading Expenses

Futures trading expenses are those costs incurred or instigated during futures
trading, such as commissions and transaction fees, that are payable by the
traders. To trade crude oil futures, the trading parties need to have not only the
appropriate personnel and equipment, but also a portion of their trading funds
tied up as margin. This margin normally equals to about 5%-10% of the notional
value of the contract. It is a form of “investment” required for trading on a futures
exchange, not a component of the futures price. Traders also need to pay
applicable commissions which, together with other trading costs, constitute an
appreciable portion of the price of crude oil futures. The cost of these idle funds
and service charges is ultimately reflected in the price of the futures product.

4.Expected Profits from Trading

Expected profit from futures trading includes both the average return that would
be expected on the trading funds if they were invested elsewhere and the risk
premium for assuming the trading risks. Accordingly, traders of crude oil futures
can be classified as hedgers and speculators. While hedgers enter the market to
primarily control their trading risks, without any excessive expectation for profit,
speculators do so for the sole purpose of making a profit from price fluctuations.
Because speculators are essential to market activity and the wellbeing of futures
contracts, the price of crude oil futures also reflects their reasonable profit
expectations.

32
 5.Circulation Expenses

Circulation expenses include transportation and incidental expenses, packaging

fees, and safekeeping fees for the underlying commodities. Given that futures
trading is based on the deliverability of the underlying commodities at a future
time, all futures contracts specify a delivery venue. For example, the delivery
venue of NYMEX light sweet crude oil futures is Cushing, Oklahoma, USA.
Because most of the crude oil being traded is not be produced at the point of
delivery, its producers must either ship it to the designated location or provide
a distance-based compensation to the buyers. These expenses are also an
important part of the price of crude oil futures.

Influencers of Crude Oil Futures Price

Because the futures market is built on the spot market, its further development
is inextricably linked to the latter. They react very similarly to market updates,
such that prices in these two markets shadow each other’s movements both in
direction and in magnitude of fluctuation. This kind of interactivity and sustained
balance also apply to the futures and spot prices of crude oil.

International oil prices are determined by both the futures market and the spot
market. Therefore, factors that influence the spot price, such as imbalance
between the supply and demand, may also impact the futures price. In some
cases, however, the two prices may diverge due to certain special factors that
influence only the futures price, such as speculation by investment funds and
other financial factors.

In addition, like other commodities, the price of crude oil is also swayed by
market supply and demand. However, because crude oil has the dual status
of being a key strategic resource, its price is also substantially influenced by
political, economic, diplomatic, and military factors. In sum, the price of crude oil
futures is impacted by:

1.spot market factors;

2.speculation by investment funds;
3.U.S. dollar, exchange rate, interest rate, and capital liquidity;
4.emergencies and political factors.

33
 Costs of Crude Oil Imported to Bonded Zones

China mainly uses the average of Platts Dubai an Oman prices as the pricing
benchmark for crude oil imported from Middle East, and the Brent futures price
for crude oil imported from West Africa.

The cost of crude oil imported to domestic bonded zones is generally calculated
by the following formula:

Cost of imported crude oil in bonded zones = CIF × exchange rate + other
expenses

Exchange rate is based on the daily currency quotations;

Other expenses include: import agency fees, port/dock charges, storage

fees, commodity inspection fees, drayage, sanitation inspection fees, insurance,
interest, urban maintenance and construction tax, educational surcharge, flood
prevention fees, etc.

Crude oil traded on INE is based on “Net pricing, bonded delivery”, i.e., the
trading price is net of VAT and customs duties. If the crude oil is transported
from a bonded zone to within the territory of China, its price after tax (in RMB)
will be as follows:

Crude oil price (incl. tax) = Bonded crude oil price × (1 + VAT rate) × (1 +
Custom duty rate)

VAT rate is 13%;

Custom duty rate: 0 for the most favored nations; 85 yuan/metric ton
otherwise.

*As of March 2020

34
 Hedging and Arbitrage
with Crude Oil Futures

Hedging with Crude Oil Futures

Hedging is a futures trading practice aimed to mitigate price risks in the spot
market. To create a hedge, the trader buys (or sells) futures contracts whose
underlying asset is of identical quantity to that sold (or bought) in the spot
market, so that losses in the spot market will be favorably offset by gains in
the futures market and vice versa. The offsetting mechanism between the spot
commodity and futures commodity so established helps minimize the price risk.

1.Short Hedge by Oil Producers and Refineries

Oil producers and oil refineries, suppliers of crude oil and refined oil,
respectively, have an interest to maintain a reasonable profit margin for the
finished goods they are about to supply to the market and the in-process goods
they intend to sell to the market in the future. To avoid potential losses at the
actual time of sale due to price change, they can take a short hedge position
on the corresponding futures product, i.e., first sell the same quantity of futures
product, and then, at time of sale of the spot product, purchase the same
quantity of futures product to close out their position.

Here is an example: an oilfield learned in July that the oil price was 350 yuan/
barrel, which it believed to be quite favorable and increased its output as a
result. However, the oilfield was also worried about an oversupply in the spot
market would cause the oil price to fall, eroding its profit margin. To avoid the
risk of falling prices, the oilfield decided to take a short hedge in crude oil futures
on INE. This hedge and the resulting gains are illustrated below:

35
 Spot Market Futures Market Basis
10 lots of SEP crude oil contract −¥20 a
July 1 Price of crude oil: ¥350 a barrel
sold at ¥370 a barrel barrel
10,000 barrels sold at ¥325 a 10 lots of SEP crude oil contract −¥20 a
August 1
barrel bought at ¥345 a barrel barrel
Hedging
− ¥25 a barrel + ¥25 a barrel
Result
Net gain or loss: 0

While the adverse price movement of RMB 25 a barrel in the spot market incurs
a loss of RMB 250,000 to the oilfield, a gain by the same amount in the futures
market has offset that, thereby eliminating the negative effect from the price
change.

2.Long Hedge by Petroleum Product Processors and Refined

Oil Consumers
Petroleum product processors and refined oil consumers – oil refineries,
petrochemical companies, airlines, to name a few – are concerned about a price
increase in crude oil or refined oil, which would raise their cost of raw materials.
To avoid potential losses resulting from a price hike at time of purchase of such
raw materials, they can take a long edge position in the futures market, i.e., first
buy the same quantity of futures product, and then, at time of purchase of the
relevant spot product, sell the futures product to close out their position.

Example: through a forward contract concluded on June 1, an oil refinery

agreed to supply a local distributor with a shipment of goods in September.
The contract stipulated a fixed price for such shipment, basing on the crude oil
futures price of RMB 350 a barrel then prevailing on INE. At the time of contract
execution, the oil refinery had neither the goods in stock nor any guaranteed
source and price of raw materials. To control its cost and lock in profit, the oil
refinery decided to enter into a crude oil futures trade on INE. The details of this
trade are given below:

36
 Spot Market Futures Market Basis
10 lots of SEP crude oil contract −¥20 a
June 1 Price of crude oil: ¥350 a barrel
bought at ¥370 a barrel barrel
10,000 barrels bought at ¥375 a 10 lots of SEP crude oil contract −¥20 a
August 25
barrel sold at ¥395 a barrel barrel
Hedging
− ¥25 a barrel + ¥25 a barrel
Result
Net gain or loss: 0

While the adverse price movement of RMB 25 a barrel in the spot market incurs
a loss of RMB 250,000 to the oilfield, a gain by the same amount in the futures
market has offset that, thereby eliminating the negative effect from the price
change.

3.Hedging by Petroleum Product Dealers

Petroleum product dealers such as oil traders and storage and transportation
service providers buy and sell spot commodities regularly. Because any
mismatch in trading quantity and time will result in risks, petroleum product
dealers often choose a hedging strategy based on their monthly net exposure in
the spot market.

37
 Arbitrage with Crude Oil Futures

Arbitrage is a trading strategy in which a trader simultaneously buys and sells

two different futures contracts to seek profit from a favorable change in the basis
between the contracts. Arbitrage includes calendar arbitrage and cross-product
arbitrage.

1.Calendar Arbitrage
In calendar arbitrage, the trader seeks to make a profit by offsetting positions
in two futures contracts with the same underlying asset but different delivery
months when there is any unusual deviation from the normal basis between the
two contracts. Calendar arbitrage can be classified into bull spread and bear
spread.

In a bull spread with crude oil futures, the trader goes long on a nearby month
contract and simultaneously goes short on a far month contract, and stands
to profit when the price of the front month contract rises more than that of the
far month contract. In a bear spread, by contrast, the trader would go short on
a nearby month contract and go long on a far month contract, making a profit
when the price of latter falls less than that of the former.

Bull Spread

Spread
10 lots of AUG crude oil contract 10 lots of OCT crude oil contract
May 1 ¥6 a barrel
bought at ¥350 a barrel sold at ¥356 a barrel
10 lots of AUG crude oil contract 10 lots of OCT crude oil contract
June 1 ¥2 a barrel
sold at ¥360 a barrel bought at ¥362 a barrel
Arbitrage
+ ¥10 a barrel − ¥6 a barrel
Result
Net gain = (¥10 a barrel − ¥6 a barrel) × 10,000 barrels = ¥40,000

38
 The above example shows that, in a normal market, the success of an arbitrage
hinges on a narrower spread in the future. For crude oil futures, the spread
between two consecutive month contracts is generally decided by the monthly
carrying charge for crude oil warrants. For two such contracts within the same
crude oil production year, if the spread between them is both greater than,
and expected to fall back to, the carrying charge, then a profit can be made
by simultaneously selling the far month contract and buying the nearby month
contract. A larger spread would also mean a lower risk and higher profit.

The situation for an arbitrageur reverses in an inverted market, where a larger

spread in the future becomes profitable. Moreover, whereas in a normal market
the spread between two consecutive months is tethered to the carrying charge,
here the premium of the front month over the far month is not capped, meaning
that an arbitrage can have a substantial payoff at limited risks.

Bear Spread

Spread
10 lots of OCT crude oil contract 10 lots of DEC crude oil contract
July 1 ¥1 a barrel
sold at ¥354 a barrel bought at ¥355 a barrel
10 lots of OCT crude oil contract 10 lots of DEC crude oil contract
August 1 ¥2 a barrel
bought at ¥350 a barrel sold at ¥352 a barrel
Arbitrage
+ ¥4 a barrel − ¥3 a barrel
Result
Net gain = (¥4 a barrel − ¥3 a barrel) × 10,000 barrels = ¥10,000

Unlike the earlier examples, in a bear spread, the success of the arbitrage in a
normal market hinges on whether the spread will widen. If the spread between
two consecutive month contracts is both less than, and expected to rise up to,
the carrying charge, then a profit can be made by simultaneously buying the far
month contract and selling the nearby month contract. The smaller the spread
is, the lower the risk and the higher the profit will be.

If it were an inverted market, the arbitrage would be profitable from a narrowing

spread. And as described earlier, because the spread between the nearby
month contract and the far month contract in an inverted market will not be
reined in by the carrying charge as in a normal market, an arbitrage in this type
of market has limited profit potential but unlimited risk.

39
2.Cross-Product Arbitrage
Cross-product arbitrage is designed to generate profit from the price difference
between two futures contracts with different but related underlying commodities.
Specifically, the arbitrageur first buys one futures contract and simultaneously
sells another of the same delivery month and for a related commodity, then
waits for an opportune moment in the future to offset both to make profit. To be
effective, a cross-product arbitrage must satisfy the following conditions: (1)
the two commodities should be related and interchangeable to some extent;
(2) the commodities should be affected by the same factors; and (3) the futures
contracts being bought and sold should generally have the same delivery
month.

Arbitrage between related commodities

There is generally a reasonable spread between the prices of two related

commodities. Any deviation from this reasonable spread creates arbitrage
opportunities. For example, if the spread is expected to narrow, then buying
the lower-price contract and selling the higher-price contract should generate a
profit.

Arbitrage between raw material and finished product

Normally there is a price difference between a raw material and any finished
product made from such raw material. An arbitrage opportunity exists between
these two commodities if this price difference deviates from the normal range.
As is the case above, if the spread is expected to narrow, then buying the lower-
price contract and selling the higher-price contract should generate a profit.

40
 Guide to Crude Oil Futures Trading

Modes of Access

Domestic Investors

Domestic investors can trade crude oil futures through a domestic Futures
Firm Member; With regard to the domestic investors, who are eligible for INE
membership, may apply to become a Non-Futures Firm Member to directly
engage in the trading of crude oil futures.

Overseas Investors

4 way of global participation accesses to INE are:

I: through domestic futures firms authorized as their direct agents

II: through Overseas Intermediaries who in turn engage domestic futures
firms or Overseas Special Brokerage Participants (“OSBP”)
III: through OSBPs as their agents
IV: as Overseas Special Non-Brokerage Participants (“OSNBP”)

Domestic Overseas
Domestic FF
Member
Domestic FF
Member
Over-seas Client

Domestic FF
Dom. Client

Member Overseas
Interme-
INE

diary
OSBP
Domestic Non-
FF Member
OSNBP

Note: Black arrows indicate direct access of trading, clearing and settlement. Grey arrows indicate direct
access of trading directly, but clear and settle trades through a carry broker who must be a domestic FF
Member.

41
 Market Access for Domestic Members and Clients

Membership Admission Procedures

Prepare application materials

INE receives and reviews the application

Obtain the membership certificate

Open a dedicated fund account as required by INE

Obtain trading seat and trading privileges

Register with CFMMC

End of admission process

42
 Domestic Client Market Access and Trading Procedures

入市Entry
Market

Make trading
Acquire general 选择期货公司 交易准备
了解期货市场 Choose a futures preparations:
firm 和经纪人 心理、知识、信息等
knowledge about
and a broker knowledge, information,
the futures market
mental, etc.

办理开户手续
Account Opening

Sign签字认可
the Futures 签定 开立账户
Open accounts
Sign the Futures
Risk Disclosure
“风险说明书” 期货经纪合同
Brokerage Contract 交纳交易保证金
and deposit trading
Statement margin

交易
Trading

申请交易编码
Apply for trading
一户一码
code Place远程端下单
orders remotely
One trader one ID

43
Trading and Clearing Procedures

Place order Orders may be placed in writing or

through telephone, computer, the
internet, etc.

Order execution
Client orders are sent to the order
management system and then to
the central matching system. Order
matching is based on price priority
and time priority.

Receive execution report

Once an order is executed, the
system automatically sends back an
execution report with the trading price
and volume.

Verify trade record

Record of each client trade is kept by
the futures firm for a minimum of 5
years in general.

INE clears for members

Gains or losses, transaction fees,
trading margin, etc. are settled daily.

Members clear for clients

44
 Trading and Clearing Procedures

Seller Buyer
Delivery Delivery Delivery
Invoice Warrant Warrant Invoice
payment intention payment

1st delivery day

INE receives warrants from seller and
delivery intention from buyer

2nd delivery day

INE allocates standard warrants to the
buyer

3rd delivery day

INE completes exchange of instruments
Buyer pays delivery payment and receives warrants before 14:00
Seller receives delivery payment before 16:00

4th and 5th delivery days

INE receives invoice from seller, unfreezes seller’s margin, and issues invoice to buyer

45
 Market Access for Overseas Clients and Brokers

Application/Registration Procedures for Overseas Special

1. Approval Procedures for Overseas Special Non-Brokerage Participants

Prepare application materials

Select a futures firm as the clearing member

Enter into an Authorized Clearing Agreement

INE receives and reviews the application

Obtain the Overseas Special Participants certificate

Open futures settlement accounts as required by INE

Obtain trading seat and trading privileges

Apply for OSNBP trading code at INE

End of application process

46
 2. Approval Procedures for Overseas Special Brokerage Participants

Prepare application materials

Select a futures firm as the clearing member

Enter into an Authorized Clearing Agreement

INE receives and reviews the application

Obtain the Overseas Special Participants certificate

Open futures settlement accounts as required by INE

Obtain trading seat and trading privileges

Register with CFMMC

End of application process

47
3. Filing Procedures for Overseas Intermediaries

Prepare application materials

Select a futures firm or OSBP as the applicant for this filing process

Enter into an Authorized Agent Agreement

Applicant submits filing materials

INE receives and reviews the materials

INE issues notice letter approving the filing

Applicant registers account information with CFMMC on behalf of the

Overseas Intermediary

End of filing process

48
 Account Opening Procedures for Overseas Clients
1. Account opening procedures through a domestic futures firm

Prepare relevant materials and open account with a domestic futures firm

Domestic futures firm reviews and archives client materials and opens
account

CFMMC checks the completeness of account opening materials

INE checks the consistency of account opening materials, creates the

account, and assigns a trading code

Obtain the trading code

End of account opening procedures

49
2. Account opening procedures for an Overseas Intermediary

Prepare account opening materials

Overseas Intermediary reviews and archives client materials and opens

account

CFMMC checks the completeness of account opening materials

Domestic futures firm and OSBP conduct account opening procedure

CFMMC forward materials to INE

INE checks the consistency of account opening materials, creates the

account, and assigns a trading code

Obtain the trading code

End of account opening procedures

50
 3. Account opening procedures for an Overseas Special Brokerage Participant

Prepare account opening materials and open account with an OSBP

OSBP reviews and archives client materials and opens account

CFMMC checks the completeness of account opening materials

INE checks the consistency of account opening materials, creates the

account, and assigns a trading code

Obtain the trading code

End of account opening procedures

51
4. Account opening procedures for an Overseas Special Non-Brokerage
Participant

Prepare account opening materials and opens account at INE

INE checks the consistency of account opening materials, creates the

account, and assigns a trading code

Obtain the trading code

Participate in futures trading

End of account opening procedures

52
 Trading and Clearing Procedures for Overseas Clients
1. Trading directly through a domestic futures firm

Overseas client places an order

Domestic futures firm submits order to INE

INE acknowledges receipt of order

Order execution

INE sends back execution report

Domestic futures firm verifies the trade

INE clears for the domestic futures firm

Domestic futures firm clears for the overseas client

53
2. Trading through an Overseas Intermediary

Overseas client places an order

Overseas Intermediary submits order to its carrying domestic futures firm

Domestic futures firm submits order to INE

INE acknowledges receipt of order

Order execution

INE sends back execution report

Domestic futures firm verifies the trade

INE clears for the domestic futures firm

Domestic futures firm clears for the Overseas Intermediary

54
 3. Trading through an Overseas Special Brokerage Participant

Overseas client places an order

OSBP submits order to INE

INE acknowledges receipt of order

Order execution

INE sends back execution report

OSBP verifies the trade

INE clears for the FF Member authorized by OSBP as its clearing member

The FF Member clears for the OSBP

55
4. Trading as an Overseas Special Non-Brokerage Participant

OSNBP submits an order to INE

INE acknowledges receipt of order

Order execution

INE sends back execution report

OSNBP verifies the trade

INE clears for the authorized clearing member

The FF Member clears for the OSNBP

56
 Delivery Procedures for Overseas Clients
1. Basic Delivery Procedures

Seller Buyer

Invoice Payment Warrant Delivery Warrant Payment Invoice

intention

1st delivery day

INE receives warrants from seller and
delivery intention from buyer

2nd delivery day

INE allocates standard warrants to the
buyer

3rd delivery day

INE completes exchange of instruments
Buyer makes payment and receives warrants before 14:00
Seller receives payment before 16:00

4th and 5th delivery days

INE receives invoice from seller, returns seller’s margin, and issues invoice to buyer

57
2.Trading directly through a domestic futures firm

Seller Buyer
Overseas Client Overseas Client

Seller Buyer
Domestic futures firm Domestic futures firm

Basic delivery procedures

3.Trading through an Overseas Intermediary

Seller Buyer
Overseas Client Overseas Client

Seller Buyer
Overseas Intermediary Overseas Intermediary

Seller Buyer
Domestic futures firm Domestic futures firm

Basic delivery procedures

58
 4. Trading through an Overseas Special Brokerage Participant

Seller Buyer
Overseas Client Overseas Client

Seller Buyer
OSBP OSBP

Seller Buyer
Domestic futures firm Domestic futures firm

Basic delivery procedures

5. Trading as an Overseas Special Non-Brokerage Participant

Seller Buyer
OSNBP OSNBP

Seller Buyer
Domestic futures firm Domestic futures firm

Basic delivery procedures

59
 Other Procedures and Key Rules

Day-End Clearing Procedures

INE day-end clearing procedures

After the close of each trading day, INE settles the profit or loss, trading
margin, transaction fees, taxes, and other fees for each member based on the
settlement price of each contract, and transfer the net receivable or payable of
each member by crediting or debiting its clearing deposit accordingly.

Adjust margin rates based on daily market conditions or relevant rules

Perform end-of-day clearing

Issue margin call as necessary

Require additional currency-based margin for the settlement process

(if necessary)

Perform re-clearing

End of clearing; send settlement data to members

60
 Futures Trading Rules
1. Risk management rules

(1) Trading margin requirement

“Trading margin” refers to funds deposited by a member into the dedicated

settlement account of INE to ensure the fulfillment of contracts and to maintain
the positions being held by the member. The minimum trading margin for crude
oil futures contract is 5% of the contract value.

The rate of trading margin for a futures contract will vary during its lifecycle, i.e.,
from the day of listing to the last day of trading.

Rate of Trading Margin at Different Stages of a Crude Oil Futures Contract

Rate of Trading
Stage of Crude Oil Futures Contract
Margin
From the day of listing 5%

From the first trading day in the month before the delivery month 10%

From the second trading day before the last trading day 20%

If the trading margin for a futures contract needs to be adjusted, INE will settle
all open positions in the contract at the new margin rate during daily clearing
on the trading day before the day on which the new rate is to take effect. Any
member whose margin is below the updated minimum requirement should
eliminate the shortfall before market open of the next trading day.

A seller may use standard warrants as the performance bond for its positions in
any futures contract, provided both the type and quantity of the underlying are
identical. In this case, the trading margin requirement for these positions will be
waived.

61
(2) Price limits

“Price limit” refers to the maximum upward and downward price movement
permitted within one trading day for a contract compared with its settlement
price from the previous day. Orders with price beyond this limit will be
considered invalid and will not be executed.

If Limit-locked Market occurs to a crude oil futures contract on a trading day

(denoted as D1, the trading days that follow will be referred to as D2, D3, etc.),
INE will raise the price limit and the trading margin for the contract as follows:

Example

Contract
D1 D2 D3
Specification

Price limit 4% 4% 4% + 3% = 7% 4% + 5% = 9%

Trading margin
at close of 5% 7% + 2% = 9% 9% + 2% = 11%
trading session

If a same direction Limit-locked Market continues to exist on D3, then at daily

clearing on D3, INE may suspend the withdrawal of funds by some or all of its
members and take the following additional measures:

(i) if D3 is the last trading day of the contract, the contract will directly proceed
to settlement and delivery on D4;

(ii) if D4 is the last trading day, the contract will continue to be traded on D4 at
the price limit and trading margin for D3, and will directly proceed to settlement
and delivery on D5;

(iii) if neither D3 nor D4 is the last trading day, then after market close on D3,
INE may implement the measures under either Article 19 or Article 20 of the
Risk Management Rules of the Shanghai International Energy Exchange (the
“Risk Management Rules”) in view of market conditions.

62
 Article 19 of the Risk Management Rules provides that after market close on
D3, INE may in its sole discretion announce that trading of the futures contract
will continue D4, and concurrently take one or more of the following measures:

(i) raising the trading margin requirement for one or both trading directions
(long, short, or both) by the same or different percentage points for some or all
of the members and/or Overseas Special Participants (“OSP”);

(ii) suspending some or all of the members and/or OSPs from opening new
positions;

(iii) adjusting the price limit to 7 percentage points above the price limit on D1;

(iv) limiting the withdrawal of funds;

(v) requiring the liquidation of open positions by a prescribed deadline;

(vi) performing forced liquidation; and/or

(vii) taking any other measures INE deems necessary.

If INE implements any of the above measures, the trading of the contract on D5
will be as follows:

(i) if same direction Limit-locked Market does not occur on D4, the price limit
and the trading margin for D5 will return to their normal levels;

(ii) if reverse direction Limit-locked Market occurs on D4, a new round of Limit-
locked Market begins, i.e., D4 becomes D1 for this new round and the trading
margin and price limit for the following trading day are set by referencing Article
16 of the Risk Management Rules;

(iii) if same direction Limit-locked Market occurs again on D4, INE will
announce that an abnormal circumstance exists and will take risk control
measures per applicable rules.

63
Article 20 of the Risk Management Rules provides that after market close on
D3, INE may announce to suspend the trading of the futures contract on D4,
and announce on D4 its decision to take either of the measures stipulated in
Article 21 or 22 of these Risk Management Rules.

Solution 1 (Article 20): INE may in its sole discretion announce that trading of
the futures contract will be extended to D5, and concurrently take one or more
of the following measures:

(i) raising the trading margin requirement for some or all of the members and/
or OSPs at the same or different rates for either long positions, short positions,
or both;

(ii) suspending some or all of the members and/or OSPs from opening new
positions;

(iii) adjusting the price limit to any value not more than ±20%;

(iv) limiting the withdrawal of funds;

(v) requiring the liquidation of open positions by a prescribed deadline;

(vi) performing forced liquidation; and/or

(vii) taking any other measures INE deems necessary.

64
 If INE implements any of the above measures, the trading of the contract on D6
will be as follows:

(i) if same direction Limit-locked Market does not occur on D5, the price limit
and the trading margin for D6 will return to their normal levels;

(ii) if reverse direction Limit-locked Market occurs on D5, a new round of Limit-
locked Market begins, i.e., D5 becomes D1 for this new round and the trading
margin and price limit for the following trading day are set by referencing Article
16 of the Risk Management Rules;

(iii) if same direction Limit-locked Market occurs again on D5, INE will
announce that an abnormal circumstance exists and will take risk control
measures per applicable rules.

Solution 2 (Article 20): On D4, INE may in its sole discretion perform forced
position reduction with respect to the futures contract by matching, at the D3
price limit and on a pro rata basis, (a) all orders placed at the limit price but
remained unfilled by market close on D3, with (b) the open positions held by
all traders (i.e., clients, Non-Futures Firm Members, and OSNBPs) who record
net gains on their positions in the contract. Long and short positions held by
any such trader will be mutually offset before being closed out in the foregoing
manner.

65
(3) Risk management during major price fluctuations

When the cumulative price increase or decrease (“N”) on a futures contract

reaches 12% over 3 consecutive trading days (denoted as D1−D3); or 14% over
4 consecutive trading days (denoted as D1−D4); or 16% over 5 consecutive
trading days (denoted as D1−D5), INE may take one or more of the following
actions in view of the market conditions, provided the CSRC is notified of the
actions in advance:

(i) raising the trading margin requirement for some or all of the members and/
or OSPs at the same or different rates for either long positions, short positions,
or both;

(ii) limiting the withdrawal of funds for some or all of the members;

(iii) suspending some or all of the members and/or OSPs from opening new
positions;

(iv) adjusting the price limit to any value not more than ±20%;

(v) requiring the liquidation of open positions by a prescribed deadline;

(vi) performing forced liquidation; and/or

(vii) taking any other measures INE deems necessary.

N is calculated as follows:

Pt - P0
= P0 × 100% t=3,4,5 and
N

P0 is the settlement price on the trading day preceding D1

Pt is the settlement price on trading day Dt, where t = 3, 4, 5, i.e.,
P3 is the settlement price on D3
P4 is the settlement price on D4
P5 is the settlement price on D5

66
 (4) Position limits

“Position limit” refers to the maximum short or long positions allowed to be

held in a contract by any one member, OSP, Overseas Intermediary, or client
pursuant to INE rules.

Position Limits at Different Stages of a Crude Oil Futures Contract

Crude Oil Futures

Open interest in any futures contract ≥ 75,000 lots

From day of listing to the month
before the delivery month Proportional FF Members, OSBPs,
25%
position limit Overseas Intermediaries

From day of listing to the last Non-FF Members, OSNBPs 3,000 lots
trading day of the third month Position limit
before the delivery month Client 3,000 lots

Non-FF Members, OSNBPs 1,500 lots

From the second month before
Position limit
the delivery month
Client 1,500 lots

Non-FF Members, OSNBPs 500 lots

From the month before the
Position limit
delivery month
Client 500 lots

Note: All numbers in lot are on a one-sided basis (long or short).

(5) Large trader reporting

A Member, an OSP or a Client whose general position in a futures contract

reaches the general position limit set by the Exchange, or an Overseas
Intermediary whose general position in a futures contract reaches or exceeds
sixty percent (60%) of its general position limit, shall take the initiative to report
to the Exchange by 15:00 of the following trading day.In view of the market risk
profile, INE may require specific members, OSPs, Overseas Intermediaries, or
clients to submit large trader position reports or other supporting materials, and
may examine these documents from time to time.

67
(6) Forced liquidation

INE will force liquidate open positions in the following situations:

(i) the clearing deposit balance of a member recorded on any of the internal
ledgers at INE，which are whether to serve its own clients or its authorized
clearing entities， falls below 0, and the member fails to meet the margin
requirement within the specified time limit;

(ii) the open position of a Non-FF Member, OSNBP, or client exceeds the
applicable position limit;

(iii) a Non-FF Member, OSNBP, or client fails to round the positions held in a
futures contract to multiples as required within the specified time limit, or is not
qualified to conduct delivery for matured contracts in its possession;

(iv) any violation of INE rules that warrants forced liquidation

(v) any emergency happens that warrants a forced position liquidation; or

(vi) any other conditions exist that makes the forced position liquidation
necessary.

(7) Risk warning

INE applies risk warning. INE may, as it deems necessary, resort to the
following measures , alone or in combination, to warn against and resolve risks:
requesting an explanation from market participants with respect to a specific
situation; conducting an interview to give a verbal alert; issuing a risk warning
letter; giving a reprimand; issuing a risk warning notice to the public; and/or
other measures deemed necessary by INE.

68
 2. Hedging rules

Hedging is a risk avoidance strategy wherein the trader buys (sells) futures
contracts whose underlying asset is of identical type and quantity to that to be
sold (bought) in the spot market, so that losses suffered in one market will be
mostly equal to gains in the other market regardless of the price movement in
the spot market.

Hedging positions in crude oil futures contract require the approval of INE.
Hedge positions are classified into long hedge and short hedge. The hedge
positions can be classified into regular months (i.e., from the day of listing to the
last trading day of the third month before the delivery month) and the nearby
delivery months (i.e., from the second month before the delivery month to the
first month before the delivery month).

(1) A Non-FF Member, an OSNBP or a Client shall provide the following

materials to apply for the hedging quota for regular months in accordance with
the contract:

(i) an Application (Approval) Form of Hedging Quota for Regular Months,

including applicant’s basic information, contracts applied, hedging quota applied
for regular months and other information;

(ii) a copy of the business license, a certificate of incorporation, or other

documents which may prove the applicant’s business scope;

(iii) business performance of physical commodities in the previous year or the

latest audited annual financial report;

(iv) a business plan of physical commodities for the current year or the
following year, and any purchase and sale contracts or other valid certificates
related to the application for hedging;

(v) a hedging strategy, including analyses of the source of risks and hedging
objectives;

69
(vi) hedging management rules, if the applicant is a Non-FF Member or an
OSNBP;

(vii) other materials required by the Exchange.

A Non-FF Member, an OSNBP or a Client may apply for hedging quota for
regular months for multiple contracts once at a time.

(2) A Non-FF Member, an OSNBP or a Client, applying for hedging quota for
the nearby delivery months, may apply for the quota of certain contract(s) and
submit the following materials in accordance with the contract:

(i) an Application (Approval) Form of Hedging Quota for Nearby Delivery

Months, including the applicant’s basic information, the contracts applied, the
hedging quota applied for nearby delivery months, etc.;

(ii) a copy of business license, a certificate of incorporation, or other

documents which may prove the applicant’s business scope;

(iii) relevant materials which can prove the authenticity of the hedging needs,
including the production plan for the current year or the previous year, warrants
for physical commodities, processing orders, purchase and sale contracts,
purchase and sale invoices, or other valid certificates of the ownership of
physical commodities corresponding to the application quota;

(iv) hedging management rules, if the applicant is a Non-FF Member, or an

OSNBP;

(v) other materials required by the Exchange.

If the above materials have been submitted to the Exchange and no change
occurs thereafter, there is no need to re-submit the materials.

70
 (3) Time of application and use of hedging quota

Using SC1905 as an example:

Fourth Month Third Month Second Month First Month

before Delivery before Delivery before Delivery before Delivery Delivery
Month Month Month Month Month
Jan Feb Mar Apr May

1 … 31 1 … 28 1 … 29 1 … 25 26 29 30 1

Last 3 trading
App. Listing
Regular Months

days
Window

Quota Quota
Use Approved
conversion conversion
Window

App.
Nearby Delivery

Window
Months

Use
Window

Type of Quota Approved

Use
Can be reused One-time use only

Note 1: “Quota conversion” refers to the conversion of a client’s regular months hedging quota into nearby
delivery months hedging quota, taking place if client is not granted the latter. In this circumstance, the
hedging quota need to base on the lower of (a) the regular months hedging quota granted to the client and
(b) the general position limit of the contract in nearby delivery months.
Note 2: Application deadline for nearby delivery months hedging quota is the 9th trading day before the last
trading day.

3. Arbitrage rules

Arbitrage is the strategy of simultaneously buying a futures contract and selling

another to make profit from the price difference between the two. Arbitrage
trading is classified into calendar spread arbitrage, and cross-product arbitrage.
Products available for cross-product arbitrage will be separately announced
by INE. Arbitrage positions can be classified into arbitrage positions for regular
months and arbitrage positions for nearby delivery months.

71
Arbitrage positions in crude oil futures contract require the approval from INE.
A client should apply for the arbitrage quota at where it established its account;
after verifying the client’s application, the account opening institution will then
complete the application process at INE. Non-FF Members and OSNBPs should
apply to INE directly.

(1) A Non-FF Member, OSNBP, or client should submit the following materials
when applying for regular months arbitrage quota for crude oil futures:

(i) Application (Approval) Form of Arbitrage Quota for Regular Months;

(ii) arbitrage trading strategies, including the description of fund source and
size, calendar spread arbitrage or cross-products arbitrage and any other
relevant factors; and

(iii) other materials required by INE.

(2) A Non-FF Member, OSNBP, or client should submit the following materials
when applying for nearby delivery months arbitrage quota:

(i) Application (Approval) Form of Arbitrage Quota for Nearby Delivery

Months;

(ii) arbitrage trading strategies, including the description of fund source and
size, calendar spread arbitrage or cross-products arbitrage, arrangement for
position opening and reduction, intention of delivery and any other relevant
factors;

(iii) price deviation analyses for applied contract(s); and

(iv) other materials required by INE.

72
 (3) Time of application and use of arbitrage quota

Using SC1905 as an example:

Fourth Month Third Month Second Month First Month

before Delivery before Delivery before Delivery before Delivery Delivery
Month Month Month Month Month
Jan Feb Mar Apr May

1 … 31 1 … 28 1 … 29 1 … 25 26 29 30 1 …

Last 3 trading
App. Listing Cont.
Regular Months

days
Window

Use Approved
Window

App.
Nearby Delivery

Window
Months

Use
Window

4. Clearing procedures and rules

(1) Regular Operations

INE implements daily mark-to-market.

If the clearing deposit balance of a member in any internal ledger at INE is lower
than the prescribed minimum after daily clearing completes, the clearing result
will serve as a margin call from INE to the member, and the difference between
the two amounts is the amount of additional funds required by the margin call.

73
Following the margin call, the Exchange may instruct Designated Depository
Banks to debit the funds from the Member’s dedicated fund account and credit
the funds to the Exchange’s dedicated settlement account. If a deficiency still
exists, the Member shall make it up prior to the market opening of the next
trading day. In the event the Member fails to make it up, the following shall
apply:

(i) If the clearing deposit balance of any internal ledger of the Member with
the Exchange is no less than zero, the corresponding Member or OSP of such
internal ledger shall not open any new position;

(ii) If the clearing deposit balance of any internal ledger of the Member with
the Exchange is lower than zero, the Exchange shall implement forced position
liquidation or take other measures according to the Risk Management Rules of
the Shanghai International Energy Exchange.

After the completion of daily clearing, the clearing deposit balance in RMB of
any internal ledger of a Member shall not be lower than the minimum clearing
deposit; otherwise, the Exchange may debit corresponding funds in RMB from
the Member’s dedicated fund account. If a deficiency still exists, the Member
shall make it up prior to market opening of the next trading day. If the Member
fails to make it up in time, the Exchange may impose forced foreign exchange
conversion by converting the Member’s foreign currency funds in its dedicated
fund account or in the Exchange’s dedicated settlement account into RMB.

(2) Margin collaterals

Subject to INE’s approval, a Non-FF Member, OSNBP, or client may use

standard warrants, foreign currencies, and other assets as margin. The Clearing
House of INE shall be responsible for margin collateral transactions. The cutoff
time for deposit or withdrawal application submission is 15:00 of each trading
day. In a special cases, INE may extend the processing time.

74
 Margin collaterals include:

Standard warrants.

Foreign currencies (type of currency, haircut, and scope of application

shall be prescribed by INE separately); and

Other assets approved by INE.

Procedures for margin collateral transaction:

Application: To collateralize assets as margin, a Non-FF Member or

OSNBP should apply directly to INE; a client should apply to its FF Member,
OSBP, or Overseas Intermediary, and authorize the latter to complete the
application procedures on its behalf.

Verification and deposit: INE will verify and deposit the margin collaterals.

The value of the margin collateral shall be calculated as follows:

(i) For standard warrants used as margin collateral, the settlement price of
the day for the front-month futures contract of the underlying product shall be
used as the benchmark price for calculating the market value of the standard
warrants. Prior to the market close of the day, the market value shall be
calculated based on the benchmark price of the previous trading day. The
haircut for standard warrants as margin shall be set at least twenty per cent
(20%).

(ii) The benchmark price for other margin collaterals shall be determined by
INE.

The term “discounted value” means the after-haircut value of margin collaterals.
During daily clearing, INE shall update the benchmark prices of the day and
adjust the discounted values of margin collaterals according to the above-
mentioned methodology.

75
5. Delivery procedures and rules

(i) Final settlement price

The “final settlement price” is the benchmark price for the delivery settlement
of a crude oil futures contract. At delivery settlement, the buyers and the sellers
settle their trades based on the final settlement price plus the premium or
discount to the specific type of crude oil being delivered.

(ii) The bonded final settlement price is the calculation and assessment basis
of the duty-paid price after customs declaration by the holders of crude oil
bonded standard warrant. The formula for the bonded final settlement price of
the matured contract is:

Bonded Final Settlement Price = Final settlement price

(iii) When a bonded standard warrant is used for EFPs, the formula for the
EFP bonded final settlement price is:

EFP Bonded Final Settlement Price = Settlement price of the previous trading
day immediately before the EFP application day of the delivery month contract

(iv) When a non-standard warrant is used for EFPs, the final settlement price
should be negotiated by the trading parties.

(2) Mode of delivery

The delivery of the crude oil futures contract implements bonded delivery, which
refers to the delivery of crude oil for the futures contract in bonded status and
in bonded oil tanks at the Designated Delivery Storage Facilities. Besides, the
delivery of the crude oil futures contract implements warehouse delivery.

Immature crude oil futures contracts may adopt EFP delivery procedures. To
take this option, the buyer and the seller should submit their intentions and be
paired with each other in advance.

76
 (3) Delivery unit

The delivery unit of a crude oil futures contract is 1,000 barrels. The Actual
delivery quantity should be in multiples of the delivery unit.

(4) Load-in and load-out units

The minimum load-in amount of the crude oil is two hundred thousand (200,000)
barrels. The minimum load-out amount of the crude oil is two hundred thousand
(200,000) barrels. If the load-out amount is less than two hundred thousand
(200,000) barrels, the load-out operations may only be performed after the
deficiency is supplemented by physicals.

(5) Documentation required for load-in

When the bonded standard warrants are created at the time of crude oil load-
in, the inspection reports issued by the Designated Inspection Agencies, bill of
lading, certificate of origin, approval of load-in by the customs and other relevant
documents shall be provided to INE for verification.

(6) Delivery fee

To perform physical delivery, the buyer and the seller shall pay INE a delivery
fee of 0.05 yuan/barrel respectively.

The storage fee is RMB 0.2 yuan/barrel • day, which is collected from the
designated delivery warehouse or its authorized agent. INE may adjust the
storage fees according to the market situation.

The inspection fee shall be collected by each designated inspection institution

from the owner of crude oil or his authorized agent at the time of load-in and
load-out the designated delivery storage according to the current charging
standard.

77
Other charges such as port charges, port construction charges, loading charges,
etc., shall be collected by the relevant authorities from the owner of crude oil or
their authorized agents at the time of load-in and load-out of crude oil according
to the current charging standards.

(7) Management of standard warrants

A members, OSPs, Overseas Intermediaries, Clients and Designated Delivery

Storage Facilities shall use the Exchange’s Standard Warrant Management
System for all businesses related to standard warrants.

A Member, an OSP or an Overseas Intermediary shall appoint designated

personnel to conduct delivery, clearing and settlement, and other standard
warrant businesses through the Standard Warrant Management System.

The standard warrant account follows the trading code system; i.e. each
standard warrant business participant shall have one exclusive standard warrant
account.

A standard warrant may be used for physical delivery, margin collateral, pledge,
transfer, taking delivery and other purposes prescribed by INE.

(8) Loss compensation and overfill/underfill standards

Loss compensation and overfill/underfill standards are as follows:

78
79
Definition Load-In Load-Out

A Designated Delivery Storage Facility shall assume the losses Loss compensation at
due to pipeline transportation, pump losses and volatilization during load-in = Quantities of Loss compensation at
the load-in, load-out and storage of commodities. An owner shall issued crude oil bonded load-out = Quantities of
compensate the Designated Delivery Storage Facility according standard warrants × cancelled crude oil bonded
to the loss compensation standards prescribed in the provisions 0.6‰ × (settlement standard warrants × 0.6‰
regarding listed futures contracts in these Delivery Rules. The loss price of the previous × (settlement price of the
Loss
compensation at load-in or load-out of crude oil shall be made by trading day prior to the previous trading day prior to
the owners to the Designated Delivery Storage Facilities according load-in completion day the load-out completion day
to the following formula, and shall be settled between the owners of the first-nearby crude of the first-nearby crude oil
and the Designated Delivery Storage Facilities within three (3) oil futures contract + futures contract + premiums
business days after the inspection reports are issued by the premiums or discounts or discounts of the delivery)
Designated Inspection Agencies. of the delivery)

Load-In Load-Out

“Overfill or underfill” during crude oil load-in is the

“Overfill or underfill” during crude oil load-out is the
difference between the quantity specified on the quantity
difference between the quantity specified on the quantity
certificate issued by Designated Inspection Agencies and
certificates issued by Designated Inspection Agencies and
the issued quantity on the bonded standard warrants.
the cancelled quantity on the bonded standard warrants.
Crude oil “overfill or underfill” quantity during the load-in
The crude oil “overfill or underfill” quantity during load-
shall not exceed ±2% of the applied quantity. Within the
out shall not exceed ±2% of the quantity on bonded
allowed tolerance, bonded standard warrants are created
standard warrants. The owner shall directly settle with the
Overfill with quantity rounded into thousand barrels. The owners Designated Delivery Storage Facilities according to the
& shall directly settle with the Designated Delivery Storage
following formula within three (3) business days after the
Underfill Facilities according to the following formula within three (3) inspection reports are issued by the Designated Inspection
business days after the inspection reports are issued by
Agencies.
the Designated Inspection Agencies.
The payment for overfill or underfill during load-in = The payment for overfill and underfill during load-out =
crude oil “overfill or underfill” quantity within tolerance crude oil “overfill and underfill” quantity within tolerance
× (settlement price of the first-nearby crude oil futures × (settlement price of the first-nearby crude oil futures
contract of the previous trading day prior to load-in contract of the previous trading day prior to load-out
completion day + premiums or discounts of the delivery) completion day + premiums or discounts of the delivery)
(9) Exchange of Futures for Physicals

The exchange of futures for physicals, or EFP, is the process where the buyers
and the sellers who hold opposite positions of a futures contract expiring in the
same month reach an agreement through negotiation to, upon approval of the
Exchange, tender a notice of EFP to have their respective positions in such
contract closed out by the Exchange at the price prescribed by the Exchange,
and mutually agreed upon. The warrant of the underlying commodity has a
quantity equivalent to and is identical to or similar with the underlying commodity
of the futures contract.

The EFP application period is from the listing day of a futures contract to the
second trading day (including that day) prior to the last trading day of the
contract.

The Members, OSPs, Overseas Intermediaries and Clients may tender their
EFP intentions via the Exchange’s Standard Warrant Management System. The
contents of the intentions shall include the Clients’ trading codes, the products,
the contract months, the directions of the transactions, the delivery methods
of the EFPs, quantities, the contact information, etc. The buyers and sellers
may reach an agreement on their own initiatives based on the EFP intentions
published by the Exchange.

After the buyers and the sellers who hold opposite positions of a futures contract
expiring in the same month reach an agreement, either party may submit the
EFP application to the Exchange via the Standard Warrant Management System
before 14:00 of any trading day (the application day) within the EFP application
period, and perform the EFPs upon the approval of the Exchange.

If standard warrants are used for the EFPs and the EFPs are settled via the
Exchange, the EFP application shall be submitted by the Members to the
Exchange.

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 The final settlement price of the EFPs is the price agreed by the buyer and the
seller, while in case the bonded standard warrant is used and the settlement is
conducted through the Exchange, the final settlement price of the EFPs shall
be calculated according to the specific provisions regarding the listed futures
contract in these Delivery Rules.

If the standard warrants are used for the EFPs and the settlement is conducted
via the Exchange, the trading margin shall be calculated based on the settlement
price of the trading day before the application day for the corresponding delivery
month contract. The exchange of the payment for the underlying commodities
and the standard warrants shall be completed through the Exchange within the
time agreed upon by the buyer and the seller.

If the standard warrants are used for the EFPs and the settlement is conducted
directly between the buyer and the seller, the buyer and the seller shall make
payment on their own, and transfer privately settled standard warrants outside
the Exchange in accordance with the procedures prescribed in these Delivery
Rules, or transfer the standard warrants on their own after they make or take
delivery.

If the standard warrants are used for the EFPs and the settlement is conducted
via the Exchange, the seller shall submit the invoices to the Exchange within
five (5) trading days immediately after exchanging the payment for underlying
commodities and the standard warrants. If the seller submits the invoices
before 14:00, the Exchange shall return the corresponding margin during
the settlement of the day to the seller after verification. If the seller submits
the invoices after 14:00, the Exchange shall return the corresponding margin
during the settlement on the next trading day to the seller after verification. After
receiving the invoices from the seller, the Exchange shall issue the invoices to
the buyer on the next trading day. If the seller fails to submit the invoices within
the prescribed time, it shall be subject to the relevant provisions of the Clearing
Rules of the Shanghai International Energy Exchange.

All delivery payments of the EFP settled through the Exchange shall be handled
through internal transfer, bank transfer, etc.

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Standard Contract

Contract Specification

Product Medium Sour Crude Oil

Contract Size 1,000 barrels /lot
Price Quotation Yuan (RMB) per barrel (Net quotation price)
Minimum Price Fluctuation 0.1 yuan (RMB)/barrel
±4% from the settlement price of the previous trading
Daily Price Limits
day
Monthly contracts of recent 12 consecutive months
Listed Contracts
followed by eight (8) quarterly contracts
9:00-11:30 a.m., 1:30-3:00 p.m. Beijing Time, and other
Trading Hours
trading hours as prescribed by INE
The last trading day of the month prior to the delivery
Last Trading Day month. INE is entitled to adjust the last trading day in
accordance with the national holidays.
Delivery Period 5 consecutive trading days after the last trading day
Medium sour crude oil with quality specifications of API
Grades and Quality gravity of 32 and sulfur content 1.5% by weight. The
Specifications deliverable grades and the price differentials will be
stipulated separately by INE
Delivery Venues Delivery Storage Facilities designated by INE
Minimum Margin 5% of contract value
Settlement Type Physical delivery
Product code SC
Listing Exchange Shanghai International Energy Exchange

Note: Product symbol “SC” stands for Shanghai Crude or Sour Crude.

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 Appendix for the Standard Contract

Delivery Unit
The delivery unit of the standard crude oil futures contract is 1000 barrels. The
delivery quantity shall be integer multiples of the delivery unit.

Last trading day

The Last Trading Day of a crude oil futures contract shall be the last trading day
of the month prior to the delivery month. To protect the legitimate rights of all
trading parties and public interests as well as to prevent market risks, Shanghai
International Energy Exchange (INE) reserves the right to adjust the Last
Trading Day in accordance with national holidays. For example, if a national
holiday of more than three consecutive days falls between the second last
trading day, the last trading day, and a delivery day, INE may either advance or
postpone the Last Trading Day provided and shall announce in advance.

Grades and Quality Specifications

Medium sour crude oil with API gravity of 32° and sulfur content 1.5% by weight.
The deliverable grades and the price differentials will be stipulated separately
set by INE and may be adjusted based on the market conditions.

The “Crude oil” in this contract refers to the liquid hydrocarbons exploited
directly from underground natural reservoir, or a mixture of its natural forms.

Designated Delivery Storage Facilities

Designated Delivery Storage Facilities will be designated and separately
announced by INE.

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 Deliverable Grades, Quality Specification
and Price Differentials

Maximum Sulfur
Price Differential
（RMB/Barrel）
Country Grades Minimum API Content
（%）
UAE Dubai 30 2.8 0
UAE Upper Zakum 33 2.0 0
Oman Oman 30 1.6 0
Qatar Qatar Marine 31 2.2 0
Yemen Masila 31 0.8 5
Iraq Basrah Light 28 3.5 -5
China Shengli 24 1.0 -5

Note:
1.API Gravity = (141.5/SG at 60°F)-131.5. Gravity as determined by ASTM D1298 or its latest revision.
2.Sulfur as determined by ASTM D4294 or its latest revision.

INE closely monitors key changes and market developments for each
deliverable grade, and will adjust Deliverable Grades, Crude Quality Criteria &
Price Differentials accordingly.

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 Origins for Crude Futures Deliverable Grade:

1.Dubai, UAE: Fateh Terminal;

2.Upper Zakum, UAE: Zirku Island;

3.Oman, The Sultanate of Oman: Mina Al Fahal;

4.Qatar Marine, Qatar: Halul Island;

5.Masila, Yemen: Ash Shihr;

6.Basrah Light, Iraq: Basrah Oil Terminal of designated Single Point Mooring
Systems (SPM);

7.Shengli, PRC: Dongming Oil Terminal of Sinopec Shengli Oilfield Company.

INE closely monitors key changes and market developments for each
deliverable grade, and will adjust deliverable grades origination locations
accordingly.

APPENDIX

Designated Delivery Storage Facilities and

Designated Inspection Agencies for
Crude Oil Futures Contract

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 Business Contacts Info of Designated Delivery Storage Facilities

No. Name Storage Name Address Contacts Phone Fax

Lanshan North Port, Rizhao 010-59969336
1 Rizhao Base
city, Shandong province Wang,Peng 13521953358
010-59760206
Cezidao of Zhoushan city, Ji, Xianda 010-59969370
2 Cezidao Reserve 15911175216
Sinopec Petroleum Zhejiang province
Reserve Co., Ltd. 0898-28839616
83 Binhai avenue, Yangpu Zhang, Zhi Bin
18117766005
3 Hainan Base economic development zone, Zhao, 0898-28839601
0898-28839610
Hainan province, China Longdan
18117759065
0574-86750918
No.16 Tianwan road, Daxie
Ningbo Daxie Zhang,Haifeng 15869586195 0574-86750909
4 development zone, Ningbo
Branch Li,Jian 0574-86750936 0574-86750933
city, Zhejiang province
PetroChina Fuel Oil 15257403615
Company Limited Zone 2, Port authority, No.1 0759-2658098
Youyi Road, Xiashan District, Shi,Jinming 15889832944
5 Zhanjiang Branch 0759-2658109
Zhanjiang city, Guangdong Li,Yong 0759-2658113
province 13726907857
0580-2061786
Sinochem-Xingzhong Oil Sinochem- AoShan Island, Dinghai
Xiao, Bin 13906807550
6 Staging (Zhoushan) Co., Xingzhong Aoshan district, Zhoushan City, 0580-2036444
Wang,Kaiwei 0580-2061859
Ltd. Depot Zhejiang province
13646500154
Dalian PetroChina 0411-82828807
No.31, Nei Hai Ye road,
International Dalian PetroChina Ma,Lei 13840975333
7 New Port, Free trade zone, 0411-82828406
Warehousing & Bonded Depot Ge,Wenyuan 0411-82828891
Dalian, Liaoning Province
Transportation Co., Ltd. 13390533777
0532-82988371
Qingdao Shihua Crude Qingdao Dongjiakou phase Wang,Peng 15854200803
8 Qingdao Port DJK 0532-82988522
Oil Terminal Co., Ltd. one reservoir area Li,Xiaoliang 0532-82986733
13468287604
021-68405123
Yangshan Shengang Shanghai Yangshan
Dong,Wei 13788931707
9 International Oil Logistics Yangshan Depot Shengang water port 021-68405190
Xu,Tingting 021-68405060
Co., Ltd. Shenjiawan
15921888108

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87
Business Contacts Info of Designated Inspection Agencies

Name of Designated Inspection

No. Address Contacts Phone Fax
Agency
010-84603658
17th floor, Sanyuan building,
China Certification & Inspection Chen,Hong 13801063685
1 No.18, Xibahe Dongli, Chaoyang 010-84603183
Group Inspection Co., Ltd. Gu,Chen 010-84603548
district, Beijing
13810060886
0574-89070154
16th floor, Century Yuhui building,
SGS-CSTC Standards Technical Chen,Zhou 13306678519
2 No.73 Fucheng road, Haidian 0574-87777875
Services Co., Ltd. Zhao,Qi 0755-26392411
district, Beijing
13821643138
0574-87836578
North building T52-3-2, No. 1201,
Intertek Testing Services Shanghai, Guan,Lianjun 13306668721
3 Guiqiao road, Jinqiao development 0574-87840759
Co., Ltd. Zhang,Jian 0532-58715778
zone, Pudong area, Shanghai
13869863179
Technical Center for Industrial
021-67120903
Products and Raw Materials
1208 Minsheng road, Pudong area, Zhang,Jidong 13918256560
4 Inspection and Testing, Shanghai 021-67120902
Shanghai Li,Chen 021-38620750
Entry-Exit Inspection and
13331978879
Quarantine Bureau
 Transaction and Delivery Related Fees

Transaction and Delivery Related Fees

20 yuan per lot, which is waived for closing out the position opened
Transaction Fee
on the same day.

0.05 yuan/barrel. Currently, from April 10, 2020 to January 8, 2021:

delivery fee will be adjusted to 0 ( including delivery related fees
Delivery Fee
incurred from EFP and standard warrant transfer through INE
clearing services)
Storage fees are 0.2 yuan / barrel • day and shall be collected
by the Designated Delivery Storage Facility from the commodity
Storage Fees owner or its authorized representative. INE reserves the right to
adjust the rate of storage fees through announcements in view of
market development.

Inspection fees shall be collected at the prevailing rate by

Inspection Fees Designated Inspection Agencies from (with reference to the time of
load-out) the commodity owner or its authorized representative.

Other fees, such as port dues, port construction fees, loading

and unloading fees shall be collected at the prevailing rate by
Other Fees
relevant authorities from (with reference to the time of load-out) the
commodity owner or its authorized representative.
Note: The specific fees are subject to the actual announcement of INE

The copyright of this Handbook is owned by the INE. No part of this publication
may be reproduced, photocopying and/or published in any manner whatsoever
without written permission from INE. This Handbook is based on public
information deemed reliable by INE, but INE provides no guarantee for the
accuracy or completeness of such information, and disclaims all liabilities
incurred by investors from using this Handbook. This Handbook cannot be used
as investment advise.

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