Volatility increased in Chinese crude and fuel oil futures markets this week on concerns US sanctions on an oil storage terminal in east China would prevent physical deliveries for the contracts.
The State Department on August 21 imposed sanctions on Yangshan Shengang International Petroleum Storage and Transportation in Zhejiang province and Qingdao Port Haiye Dongjiakou Oil Products in Shandong province for handling imports of Iranian oil aboard tankers previously targeted by US sanctions.
Chinese majors and international trading houses store fuel oil or hold warehouse receipts in the bonded delivery tanks linked to the Shanghai Futures Exchange (SHFE) for futures contract settlement at Yangshan.
"The physical turnover at this facility may encounter difficulties, which would result in a reduction of deliverable cargo and available storage capacity on the futures market," analysts at Guotai Junan Futures said in a note earlier this week.
After the sanctions announcement, the fuel oil contract for October delivery on the Shanghai Futures Exchange, the most actively traded contract, rose for the next three trading sessions.
On Monday, the contract gained four per cent to 2,878 yuan ($402.35) a tonne with a 162-yuan difference between the high and low on the day, the widest gap since June 24, when global energy markets dropped following the ceasefire in the Israel-Iran bombing campaign.
A total of 842,000 October contracts traded that day, up from 630,000 contracts on August 22 and 348,000 contracts on August 21, according to LSEG data.
The volatility increased as some investors bet the sanctions would create deliverability issues and as traders holding short positions, which would mean they would have to deliver fuel oil when the contract expired, unwound those positions by buying futures, said two China-based fuel oil traders.
"Should no new warehouse receipts or delivery warehouses emerge in the near term, (fuel oil) futures would remain relatively strong," the Guotai Futures analysts said.
Yangshan Shengang is also a delivery point for the Shanghai International Energy Exchange's crude futures contract.
The most actively traded crude contract on the INE, for October delivery, climbed for the four trading sessions to August 26, gaining 3.3 per cent to 497.70 yuan ($69.58) a tonne. On Wednesday, the contract dropped 2.3 per cent with a 15.30-yuan gap between the high and low, the widest gap since August 4.
Prices fell because market participants are concerned about taking deliveries from Yangshan storage holding oil tied to INE contracts, said a crude trader based in China.
The SHFE and INE did not respond to requests for comment on the volatility increase.
A representative at Yangshan Shengang declined to comment when contacted by Reuters on Thursday.
A trader who participates in the SHFE markets said investors are waiting for guidance from the exchange on the effects of the sanctions on the delivery of contracts at Yangshan.
Marine fuel prices at key ports Shanghai and Zhoushan have climbed as sellers have raised prices because of the volatility, even though Yangshan deliveries have a mild impact on supply at other ports, said a trader who participates in the market.
Premiums for delivered bunker fuel, used for container ships and other vessels, at Shanghai and Zhoushan rose to about $30 per tonne over Singapore cargo quotes for both high-sulphur and low-sulphur cargoes, nearly double from early August, data from sources showed.
(Reporting by Chen Aizhu, Jeslyn Lerh, Siyi Liu, Trixie Yap; Editing by Florence Tan and Christian Schmollinger)