Thanks, Eoin for all your recent helpful comments. could you please comment now on the new oil market, I believe run by China, due to start on 01 March 2018 which is backed by gold and how this might affect world markets in so many different ways.

Eoin Treacy's view

Thank you for this question which may be of interest to subscribers. I last commented on this subject in Comment of the Day on October 2nd. 

China is the world’s largest producer of gold, largest consumer of oil and has a long-held desire to both internationalise its currency and share the burden of its domestic debt-laden banks with international investors. The fact it has offered to back its oil contract with gold is a testament to just how hard China has to work to engender trust from the international community.

The Kissinger deal with Saudi Arabia was that dollars used to purchase oil would be recycled into US Treasuries. I don’t believe China has any intention of settling in gold beyond a token quantity but the bigger question is whether it can persuade whoever it is buying oil from to recycle the proceeds into the Chinese economy? China has built a substantial domestic demand market for consumption but its bond market is still relatively underdeveloped.

Meanwhile Brent Crude Oil continues to bounce from the $60 area and a sustained move below that level would be required to question medium-term scope for continued higher to lateral ranging.

This is not China’s first commodity contract and, so far, it has been largely unsuccessful in influenced the fate of the established commodity contracts. Oil is by far the largest, most politically influenced and globally significant commodity. The fact China’s version can theoretically be settled in gold is an interesting idiosyncrasy but the reality is that oil producers need revenues they can spend to meet operating expenses so this contract is going to need a lot of support from the Chinese government if it is to be viable much less come to dominate the global market.