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China Sourcing Update: Energy Costs (Jul 2017)

1. Crude prices soar during mid-July to early August

In line with the movement of global crude prices, China’s crude prices rose sharply during mid-July to early August. For example, the Daqing crude price jumped from US$ 41.2 per barrel on 11 July to a three-month high of US$ 47.2 per barrel on 1 August, before retreating to US$ 45.4 per barrel on 11 August (see exhibit 1).

There are several reasons for the surge in global oil prices during mid-July to early August. First, US crude and gasoline inventories fell more than expected in consecutive weeks ending 14 July and 21 July, according to data from the US Energy Information Administration. Some investors regarded the inventory drawdown as a signal that the over-supply in the oil market was easing. Second, the number of oil rigs operating in the US has shown signs of plateauing in recent weeks, indicating that the growth in US production of crude oil is likely to decelerate in the coming months.

Lastly, oil prices were also supported by a further agreement reached between the Organization of the Petroleum Exporting Countries (OPEC) and some non-OPEC countries to boost compliance with their pledged production cuts; and a voluntary agreement by Nigeria, which was previously exempted from the output reductions, to limit its oil output to 1.8 million barrels per day. Saudi Arabia also said it planned to cap crude exports to 6.6 million barrels per day in August, about 1 million barrels per day below the level last year. Looking ahead, we believe that global oil prices are unlikely to rise further in the near future as it is still doubtful as to how closely the oil producing countries will comply with the production quotas and whether the output cuts can significantly mitigate the global oil supply glut amid a rising oil production in the US.

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Content provided by Fung Business Intelligence
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