17 Nov 2017
China Sourcing Update: Energy Costs (Oct 2017)
1. Crude prices climb in October
In line with the movement of global crude prices, China’s crude prices fell in early October and increased afterwards. For example, after falling from 52.2 per barrel on 29 September to US$ 50.2 per barrel on 4 October, the Daqing2 crude price rose to a twoyear high of US$ 54.9 per barrel on 30 October (see exhibit 1).
The main reason for the jump in global oil prices in the month were geopolitical tensions in the Middle East. In mid-October, Iraq’s central government took military action to regain control of oil fields in the Kurdistan region, which held an independence referendum in late September. Crude oil supplies from Iraq dropped amid production disruptions and ongoing tensions over the region. Meanwhile, the US President Donald Trump refused to certify Iran’s compliance with a 2015 international agreement that limits its nuclear development, and announced a new strategy on Iran that includes new sanctions on the country. These moves raised market concerns that Iran’s oil export capacity could be undermined.
Moreover, expectations of an extension of the oil production cuts led by the Organization of the Petroleum Exporting Countries (OPEC) drove oil prices higher in late October. It was reported that Saudi Arabia and Russia, the top two crude producers in the world, intended to extend the OPEC-led output cuts through the end of next year, further easing market fears over an oil supply glut.
Looking ahead, we expect global oil prices to stay high in the near future as the positive factors mentioned above are expected to persist.
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