After two years of preparation, the Shanghai Futures Exchange has begun online simulated fuel oil futures trading.

Fuel oil has become China's second largest imported petroleum product, second only to crude oil. The nation imported 23.8 million tons of fuel oil last year, accounting for 55 percent of its total consumption.

At present, the paper market in Singapore decides the domestic price of fuel oil. As most traders are Western investment banks and international oil companies, except few large Chinese companies, many medium-sized and smaller companies can trade only at second or even third hand, and with huge risk. These circumstances make for market prices that do not reflect the real supply and demand situation in China.

The long-anticipated fuel oil futures trade will create a domestic market for Chinese oil companies. If the nation has its own fuel oil derivatives market, oil prices will reflect supply and demand more timely and accurately.

Chen Hao, one of the Société Générale Group's top energy risk management specialists, said the world consumes 78 million barrels of petroleum daily, with China accounting for a large percentage at 6.3 million barrels per day. If the country can set up a pricing system for processed oil products or even crude oil after introducing fuel oil futures, the nation can win the initiative in the market with its large consumption and purchasing power.

At the same time, brokers can better control risk through the Shanghai Futures Exchange. Zhang Kuikuan, general manager of the Jinkaixun Financial Information Company, said fuel oil futures will play an important role in market stabilization. The futures price guides the market to some extent, especially forward prices, which directly reflect market price. Fuel oil futures will help companies to hedge or process cost budgeting.

(China.org.cn by Feng Yikun, July 1, 2004)