Business Case Studies & Business Publications

Creating an Asian Benchmark for Crude Oi...

Webb, Robert

Case

Creating an Asian Benchmark for Crude Oil

Webb, Robert

F-1981 | Published May 10, 2021 | 11 pages Case

Collection: Darden School of Business

Add To Cart Buy Now

Product Details

This case examines the 2018 decision by the Shanghai International Energy Exchange (INE) to introduce a futures contract on a type of crude oil widely used in Asia, in the hope that it would not only facilitate price discovery but also become an Asian benchmark for crude oil prices and encourage the use of the renminbi or Chinese yuan in international commerce. Accordingly, the futures contract was denominated in renminbi; specified market participants could make or take delivery of crude oil in various ports in mainland China; and the INE crude oil futures market was open to foreign traders from the outset. The almost-immediate success of the INE crude oil futures contract was the first significant challenge to the dominance of Brent North Sea Crude and West Texas Intermediate crude oil futures contracts as benchmarks. Yet, five years later, the Shanghai crude oil futures contract price was still not the benchmark price for crude oil in Asia. What might be done to help achieve that objective? This case provides a vehicle for discussing spot and derivative energy markets, benchmarks, and government policy objectives. It also highlights the role of market microstructure in creating successful financial innovations. The case is designed for use at McIntire in an upper-level undergraduate course, “Financial Trading.” It would also be suitable in an introductory finance course or a specialized financial markets and institutions course.

This case is versatile and can be used to encourage some or all of the following learning objectives: (1) Understand the role price discovery plays in financial markets. (2) Understand spot and derivative energy markets, the role of benchmarks in pricing commodities, and the impact of government policy objectives in shaping financial innovations. (3) Appreciate the role of market microstructure in creating successful financial innovations. (4) Appreciate the difficulty of creating a benchmark price.