OREANDA-NEWS. October 31, 2014. The Dubai Mercantile Exchange and the fledgling Shanghai International Energy Exchange announced a deal to cooperate on a much-needed new Asian benchmark crude oil futures contract.

But Chinese authorities have not yet approved the Shanghai crude futures contract because of concerns about loosening restrictions on physical crude oil importation.

The Shanghai International Energy Exchange, known as INE, was set up a year ago with the aim of establishing an energy derivatives trading platform that would give China more control over pricing the oil it is buying in increasing volumes, mainly from Middle East producers. Currently, it is at the mercy of London and New York, where the bulk of the world’s oil futures trading takes place.

The DME has been a booster of INE’s plans from the beginning as its Oman crude futures contract – which is a benchmark for Middle East producers – would dovetail nicely with the Shanghai contract, which INE hopes will be a benchmark for Chinese oil consumers.

INE officials have spent the past year meeting a wide range of potential partners and customers, including the chief executive of Abu Dhabi Holding Group, to work out details of the contract, including the underlying crude oil that would be delivered against it.

The INE chief executive Chu Juehai said on Monday that work is now complete and the exchange is ready, but the ball is in the government’s court. “As an exchange we are fully prepared but we are waiting for approval from the authorities,” Mr Chu said. “It won’t be too long but as yet the launch date is not determined. The government has the whole [approval] process in its hands.”

Mr Chu did not elaborate on what was causing the hold-up. But an oil trader for one of the state-owned oil Chinese oil companies who attended a briefing earlier in the day said the authorities are concerned about the physical delivery terms of the contract because they want to keep tight control on who is allowed to import crude in China.

Currently, only five state-owned oil companies, including CNPC and Sinopec, are allowed to import oil, as well as about 20 private Chinese companies. But for a contract to be effective and attract the trading volume it would need, INE needs big international oil companies, such as BP and Shell, as well as traders, such as Vitol and Mucuria, involved. Although most futures do not end up with physical delivery, a mechanism for those without import licences to take delivery will be needed.

There are also taxation and foreign exchange details that need to be worked out in terms of how the yuan-denominated Shanghai oil future will be settled.

Despite the delays, officials are gung-ho about the boost a Shanghai oil futures would give to the region’s oil market.

“The birth of the DME was to serve this very day,” said Ahmad Sharaf, the DME chairman. He said linking the producers and consumers of crude in the region would allow them to hedge the crude that they actually buy – that is, medium, sour grades, such as UAE’s Upper Zakum and Dubai – for a longer period of time.

DME’s chief executive, Chris Fix, said the current period of uncertainty for the oil market underlined the need for a better regional hedging system.

The weak regional crude market was illustrated this week when the state oil company Adnoc sold two dozen cargoes of Upper Zakum crude – about 12.5 million barrels – to buyers including Shell and Total, without insisting on determining the final destination, an unprecedented move by Adnoc which normally insists on tight control of crude marketing.

The tie-up between DME and Shanghai’s crude contract will certainly boost volume on the DME, Mr Fix said. “This will serve the actual Middle East–China trade flow and anything that does that will get the support of the oil producers and consumers.”