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China Sourcing Update: Energy Costs (May 2017)

  1. Crude prices plunge during late May to early June

 In line with the movement of global crude prices, China’s crude prices went up during early to late May and slumped afterwards. For example, after rising from US$ 42.0 per barrel on 5 May to US$ 48.1 per barrel on 24 May, the Daqing2 crude price plummeted to US$ 42.1 per barrel on 9 June (see exhibit 1).

The rise in global oil prices during early to late May was mainly due to market expectations that member countries of the Organization of the Petroleum Exporting Countries (OPEC) and Russia would extend the crude output cut beyond June 2017, and that the extended output cut would be deeper than the current one, which has reduced global crude oil production by around 1.8 million barrels per day.

Global crude prices fell sharply on 25 May after major oil producing countries announced the extension of the crude output cut into March 2018 but no deeper production cut. Crude prices slid further after the US Energy Information Administration (EIA) reported on 7 June that commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) in the US rose unexpectedly in the week ending 2 June.

A rising oil output in the US has continued to undermine the positive impacts of the output cut on crude prices. According to the EIA, the US production of crude oil expanded to its recent peak of 9.34 million barrels per day in the week ending 26 May, compared with 9.29 million barrels per day in the week ending 28 April. The EIA even predicted that the US oil production will rise to a record high of 10 million barrels per day next year.

Looking ahead, we expect global oil prices to fluctuate around the current low levels in the near term as it is still doubtful as to whether the extended output cut can significantly mitigate the global supply glut of crude oil amid a rising oil production in the US.

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Content provided by Fung Business Intelligence
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