SNP China Petroleum and Chemical Corp

By Sarah Kent and Georgi Kantchev 

The growing clout of state-backed Chinese oil traders is raising concerns over their influence on the price of crude as trade increasingly flows into markets with little regulatory oversight.

Last August, Chinaoil, the trading arm of China National Petroleum Corp., swept up around 90% of the crude then available in the Dubai market, which sets the price of the Middle East's most important benchmark. That pushed up the price of oil by hundreds of millions of dollars for dozens of Asian refiners, according to industry executives.

While this and several other trades have roiled oil markets, they appear to have attracted no regulatory scrutiny. That is stoking concern that Chinese traders are causing swings in Middle Eastern oil markets that distort prices. And nobody is watching.

"The [August] Chinese play would be a fiery red flag for me," said Bart Chilton, a former commissioner with the U.S. Commodity Futures Trading Commission. "Anytime you have a significant concentration in a market in the hands of one player, that should be a concern for regulators."

Chinaoil has bought up more than half the crude being sold in the Dubai market in 10 of the 25 months since January 2014, according to an analysis by The Wall Street Journal of data from Platts, the energy information provider that runs the benchmark. A unit of China Petroleum & Chemical Corp, or Sinopec, sold more than half the oil put on the market in seven of the months since then.

In comparison, the largest position that any one party has traded in Brent, the international benchmark, since January 2014 has been 30%.

China's influence over the global oil market has increased in tandem with its growing demand for crude. The Asian giant now consumes about 12% of the world's oil--second to the U.S.--and the trading arms of its state-owned oil companies are becoming increasingly aggressive in the amount they are buying or selling.

This increased muscle is most apparent in the Dubai benchmark--a crucial pricing mechanism for millions of barrels of Middle Eastern oil sold into Asia.

Motives behind the large trades remain unclear, but the potential impact of big players dominating unregulated markets isn't, market participants say.

Sinopec declined to comment on its trading activities, but said it operates in "compliance with relevant laws and regulations, and in accordance with the company's overall strategy and business needs."

CNPC didn't respond to requests for comment.

China's Ministry of Commerce and the China Securities Regulatory Commission didn't immediately respond to request for comment.

In August, Chinaoil swept up almost 37 million barrels in the price-setting mechanism, or enough oil to cover two weeks of demand in Germany. That helped push the price of Dubai crude above Brent--a better quality crude that normally trades at a premium to the Middle Eastern benchmark.

Industry executives struggle to think of another time when one buyer has built such a sizable oil position in a single market. The last time a trade came close was in January 1988, when trader Transworld Oil bought up most of the crude available in the Brent market--around 25 million barrels.

The August trades made oil more expensive for buyers like Balraj Kishor Namdeo, director of the refinery business of Indian state-owned oil and natural gas company Hindustan Petroleum Corp Ltd.

"The Chinese were buying left and right and that was not good for us," Mr. Namdeo said. "Regulators should be concerned about this--one trader cannot be allowed to distort the balance of the market."

Such trades are attracting increasing complaints.

In December, Mike Muller, the head of trading at Royal Dutch Shell said in a rare public statement that safeguards were needed "to prevent the risk of distortion" of the Dubai market.

Large Middle Eastern producers who price their oil off this market have raised concerns with Platts, according to people familiar with the matter. A spokesman for Platts, a unit of McGraw Hill, said that it entered "a formal consultation with participants about the evolution" of the Dubai benchmark in September.

To be sure, trade in physical crude has long had a reputation for being unregulated compared to financial markets.

Trading in oil futures takes place on exchanges like London's ICE Futures Europe or the New York Mercantile Exchange, and come under the oversight of watchdogs like the CFTC and Britain's Financial Conduct Authority. But physical oil isn't subject to the same level of scrutiny.

U.S. regulators have in the past used their jurisdiction over oil futures to crack down on physical markets. In 2014, the CFTC reached a $13 million settlement with a group of trading houses accused of manipulating oil supplies in 2008 to influence the price of derivatives tied to U.S. crude.

Later this year, the European Union will introduce market abuse legislation that will extend regulators' oversight of physical oil markets.

But as a larger share of global crude trading moves east, European and U.S. regulators will find it even harder to oversee the oil market. That's important because major western oil companies use markets like Dubai, while derivatives traded from London to New York are referenced off oil priced there.

In January, Platts, increased the number of grades of oil used to calculate the Dubai benchmark, in a move analysts say will increase the volume traded, making it less susceptible to dominance by one player. But Chinaoil still bought up almost every cargo sold that month, or nearly 9 million barrels of crude.

Platts says it is not a market regulator and isn't in a position to limit how much each trader buys or sells.

"I think it's a little odd frankly that the oil market looks to China to be one of the top three deliverers of economic and demand growth every year and yet somehow is surprised when China becomes more and more a force in the benchmarks," said David Ernsberger, the global head of oil content at Platts.

Brian Spegele contributed to this article.

Write to Sarah Kent at sarah.kent@wsj.com and Georgi Kantchev at georgi.kantchev@wsj.com

(END) Dow Jones Newswires

February 23, 2016 10:48 ET (15:48 GMT)

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