Traders have welcomed the impending resumption in trading of fuel oil futures which is the second futures product this year after the debut of cotton futures last month.

Traders hope the futures will allow them to tap into China's booming oil market.

They also hope the derivative will help China shrug off domination by the Singapore market and establish its own pricing system for fuel oil products.

But traders remain cautious about rushing into the market, at least for the time being. They said they only have a little idea about how the market could turn out.

The Shanghai Futures Exchange is ready to resume the trading of fuel oil futures next month, according to a spokesman of the exchange.

It is the first time that China has resumed trading in futures of oil products in more than a decade.

China opened oil futures exchanges in 1993 in Beijing and Shanghai, trading oil products including crude oil, gasoline, diesel and fuel oil.

They were closed two years later when the government started tightening controls over marketing of oil products, and started to clear up over-speculated futures markets.

Fuel oil, which is mainly used in power generation and petrochemical industries, is regarded as the most liberalized oil product in China with the least control by the government.

Analysts said the resumption of fuel oil futures was a test mechanism for the launch of futures trading of more important oil products such as gasoline, diesel and crude oil.

China is the largest consumer of fuel oil in Asia.

Consumption reached 42.6 million tons last year with imports accounting for more than half of the total.

Traders said the fuel oil futures, theoretically, could increase China's say in determining price, and allow users to fend off price fluctuations.

At present, fuel oil prices on the Chinese market are mainly determined by the Singapore market Asia's oil trading hub.

The prices, however, may not reflect the supply and demand scenario on the domestic market, even though China is the largest fuel oil importer in the region.

"The prices are manipulated by big players on the Singapore market," said Tao Qixin, a manager with Guangdong Petroleum Corp. "We are at a disadvantage."

A manager from Sinochem, one of China's four largest oil traders, agreed with Tao, saying China lacks leverage in deciding prices on the market.

"We believe the reopening of the futures could help establish uniform and transparent prices on the domestic market," said the manager. "In the long term, China could take the place of Singapore as the new oil trading centre in the region."

Still, traders said they would take wait-and-see attitude towards oil futures in initial development.

"It is too early to predict what the market would be," said the Sinochem manager. "We are concerned about the market becoming a playground for the big guys."

"There is no independent watchdog to oversee the market," the manager said.

A manager surnamed Liang from Nanhai Nengsheng Fuel Company also said oil traders would be cautious about investment in the market before plunging in.

"We would like to first see what will happen to the market," said Liang.

Chen Wei, deputy general manager of Beijing Eagle Petro-Engineering Consulting Co Ltd, said traders are cautious about the market, partly because they lack staff who are familiar with both futures and oil markets.

"They have passion because it is a big market," said Chen. "But they lack enough understanding of both the markets."

Chen said the current import procedure for fuel oil is too complicated for the traders to predict the physical market.

That may lead traders to withhold their investment on the futures market, Chen said.

A manager from Shanghai Futures Exchange disagreed that traders were reluctant to invest.

"As far as I know, oil traders are very interested in the market. I think the trading will be active," said the manager who spoke on the condition of anonymity.

"It is just normal for those who are not familiar with the market to be cautious about investment."

The manager said they are inviting traders to simulate the futures trading to familiarize potential investors with transaction rules.

The introduction would last for three months, he said.

Traders said they are not afraid of the over-speculation. They said the exchange has designed strict rules to avoid irregularities.

For instance, participants are required to pay a minimum 8 per cent deposit, higher than the average 6 per cent on futures markets.

Trading will be suspended when the futures rise or drop by 5 per cent in one trading day.

(China Daily July 15, 2004)