Locational arbitrage strategies for Shanghai crude futures

Hélyette Geman; John Miller; Yuanye Ma

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We describe the features and trading volumes of the major oil indexes Futures up to 2021.
The key characteristics of Shanghai oil futures are presented, in particular the optionalities they offer in terms of type of crude that can go to delivery, delivery ports in China and currency denomination.
We describe in detail an arbitrage strategy obtained by entering four positions at the same moment: a long position in Oman oil Futures, a short position in Shanghai Futures and a long position in USD/RMB Futures while also securing the freight rate.

Abstract

This paper analyzes the crude oil futures introduced on the Shanghai International Energy Exchange in March 2018 and the locational trading strategies they can provide. First, we briefly recall some features of the Brent, WTI and Oman reference indexes. Then, we focus on the Shanghai crude oil futures contracts and their unique optionality feature in terms of delivery location and crude oil chemical type. Finally, we propose an example of locational arbitrage that is hedged against foreign risk, since the contracts are the only oil futures to be denominated in Chinese currency.

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