Chinese oil companies will likely resume activities at the oil trading centre in Shanghai this year, a move to further liberalize the once tightly controlled oil market.

The centre will trade forward contracts for refined oil products, including gasoline, diesel oil, kerosene and fuel oil, industrial sources said.

The daily trading volume could reach 80,000-100,000 tons a day.

The forward contracts, which allow traders to buy and sell contracts at a fixed price on a set date, help traders avoid price fluctuations.

In the longer term, the centre hopes to play a role in influencing oil prices on the regional, or even global, market given huge oil consumption in China, the sources said.

China opened oil futures exchanges in 1993 in Beijing and Shanghai, trading crude oil, gasoline, diesel and fuel oil. They were closed two years later due to an industry overhaul and partly because of rampant speculation.

Unlike previous futures exchanges, the new trading centre will not trade oil futures, which are more standardized and strictly regulated.

Instead, the centre will be a kind of spot market. It requires its members trade their forward contracts only when they hold real products in an attempt to avoid speculation risks. Short selling and buying will be prohibited.

The source said major shareholders in the centre, including China's four largest oil companies PetroChina, Sinopec, Sinochem and China National Offshore Oil Corp, will hold a shareholders meeting this month to prepare for operations.

"The trading centre may be set up in half a year after the shareholders meeting is held," said the source who is involved in preparations.

The centre requires a registered capital of about 100 million yuan (US$12.1 million).

In the initial phase, the centre hopes to attract about 100 members, including oil producers, users and traders, to participate in trading.

Experts say the significance of the trading centre is that it helps the market, rather than the government, decide the price of oil products.

At present, the National Development Reform Commission (NDRC), China's top planner, sets up the benchmark prices for gasoline and diesel oil, based on the average rates on the three markets in Singapore, Rotterdam and New York.

Critics have said the government-set pricing system is too rigid to reflect market price fluctuations.

And non-transparent pricing could easily encourage the government to manipulate oil prices according to the needs of the national economy as a whole.

"The trading centre is conducive to pushing through market reform to further liberalize prices," said the source.

China is expected to fully open up its retail oil market by the end of this year and the wholesale market by 2007.

A manager with Sinochem's Shanghai branch said the centre will also help users cushion the risks of the price fluctuation.

In addition, "it could increase China's say in deciding the international oil prices with its increasing oil consumption," the manager said.

Last year, China surpassed Japan to become the second-largest oil consumer in the world only after the United States.

Still, uncertainties may delay the launch of the trading centre, analysts said.

Although the Shanghai Municipal Government and the NDRC have given the green light to the oil trading centre, the State Council may still suspend its operations, should it consider it as premature, analysts said.

Li Lei, research head of China International Futures Co Ltd, said the centre may not necessarily achieve its goal.

For one thing, the absence of strong supervision and regulations in the market may lead to rampant speculation, said Li.

Also, few members may be willing to join in trading as the four biggest oil companies dominate the market. Instead, more companies are eyeing oil futures, which are more standardized and regulated, he added.

Officials have said the Shanghai Futures Exchange may launch the fuel oil futures this year.

Fuel oil in China, as compared with crude or gasoline, is much more market-oriented with prices closely pegging on the international market.

(China Daily February 16, 2004)