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China Factory Prices Give an Unexpected Lift to Global Inflation

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  • China Factory Prices Give an Unexpected Lift to Global Inflation

Inflationary pressure emanating from the factory to the world is proving more resilient than economists have anticipated.

China’s producer-price inflation accelerated to 6.3 percent in August from a year earlier, exceeding all but one of 38 estimates in Bloomberg’s survey of economists. That data released Saturday followed 5.5 percent readings in the prior three months and was unexpected for analysts, who have been forecasting more moderation in pricing pressures.

The surprise strength gives support for global inflation spanning from metals to fuel and shows the effects of resilient domestic demand and reduced supplies of some commodities. China’s authorities have been closing mills and smelters to cut excessive industrial capacity and help curb pollution, in turn straining production of metals such as aluminum and steel.

“The key driver has likely come from the supply side,” such as production cuts in response to intensified environmental enforcement in recent months, Robin Xing, chief China economist at Morgan Stanley in Hong Kong, wrote in a note. The bank last week raised its 2017 PPI forecast to 5.5 percent from 4.5 percent, citing stricter anti-pollution measures.

Global metal prices soared last month as China’s demand held up on robust investment and construction amid government reforms that may crimp supplies. That market strength underpins worldwide inflation, and helps ease debt burdens on raw-material producers.

China’s environmental campaign has intensified this year. Inspections that began in Hebei, which surrounds Beijing and is the biggest steel-producing province, have been extended to several more cities and provinces and led to the closures of some businesses and factories.

Aluminum Corp. of China, the nation’s top state-owned smelter of the metal, pledged this month to cut capacity during the winter to curb emissions. Aluminum prices have has surged this year, making it one of the best-performing commodities, on expectations for supply cuts and resilient demand from property and infrastructure. That’s boosting producer inflation.

“While cyclical demand remained resilient, the ‘rationed’ output volume amid stricter environmental inspections may have led to stronger inflationary pressure in August,” Liu Wenqi, an analyst at China International Capital Corp. in Beijing, wrote in a report.

Another underpinning for better-than-expected factory prices comes from infrastructure investment, which is often used to buffer growth amid downward economic pressure. The share of spending used for road, rail and other infrastructure this year has surpassed levels during the global financial crisis, according to a Bloomberg Intelligence analysis.

That boost, however, may prove temporary, as government splurging turns to constraint later this year. Generous government spending to ensure the economy is humming nicely when the 19th Party Congress convenes in October means the fiscal pump is unlikely to kick up a notch as usual at year-end, which is when economists see growth moderating.

“August’s price data show China’s reflation story remains intact,” Tom Orlik, chief Asia economist at Bloomberg Intelligence in Beijing, wrote in a report Saturday. “The caveat is that reflation reflects more stimulus-boosted demand, and positive market sentiment, than it does efforts to close down excess supply – and is therefore subject to reversal.”

Data released Saturday also showed a pickup in the consumer price index, which exceeded estimates with a 1.8 percent increase after rising 1.4 percent in July. Prices rose from the prior month, affected mainly by increases for eggs and vegetables amid hot weather and rain, the National Bureau of Statistics said in a statement.

CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and Investing.com, with over a decade experience in the global financial markets.

Crude Oil

Oil Dips Below $62 in New York Though Banks Say Rally Can Extend

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Oil Dips Below $62 in New York Though Banks Say Rally Can Extend

Oil retreated from an earlier rally with investment banks and traders predicting the market can go significantly higher in the months to come.

Futures in New York pared much of an earlier increase to $63 a barrel as the dollar climbed and equities slipped. Bank of America said prices could reach $70 at some point this year, while Socar Trading SA sees global benchmark Brent hitting $80 a barrel before the end of the year as the glut of inventories built up during the Covid-19 pandemic is drained by the summer.

The loss of oil output after the big freeze in the U.S. should help the market firm as much of the world emerges from lockdowns, according to Trafigura Group. Inventory data due later Tuesday from the American Petroleum Institute and more from the Energy Department on Wednesday will shed more light on how the Texas freeze disrupted U.S. oil supply last week.

Oil has surged this year after Saudi Arabia pledged to unilaterally cut 1 million barrels a day in February and March, with Goldman Sachs Group Inc. predicting the rally will accelerate as demand outpaces global supply. Russia and Riyadh, however, will next week once again head into an OPEC+ meeting with differing opinions about adding more crude to the market.

“The freeze in the U.S. has proved supportive as production was cut,” said Hans van Cleef, senior energy economist at ABN Amro. “We still expect that Russia will push for a significant rise in production,” which could soon weigh on prices, he said.

PRICES

  • West Texas Intermediate for April fell 27 cents to $61.43 a barrel at 9:20 a.m. New York time
  • Brent for April settlement fell 8 cents to $65.16

Brent’s prompt timespread firmed in a bullish backwardation structure to the widest in more than a year. The gap rose above $1 a barrel on Tuesday before easing to 87 cents. That compares with 25 cents at the start of the month.

JPMorgan Chase & Co. and oil trader Vitol Group shot down talk of a new oil supercycle, though they said a lack of supply response will keep prices for crude prices firm in the short term.

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Crude Oil

Oil Prices Rise With Storm-hit U.S. Output Set for Slow Return

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Oil Prices Rise With Storm-hit U.S. Output Set for Slow Return

Oil prices rose on Monday as the slow return of U.S. crude output cut by frigid conditions served as a reminder of the tight supply situation, just as demand recovers from the depths of the COVID-19 pandemic.

Brent crude was up $1.38, or 2.2%, at $64.29 per barrel. West Texas Intermediate gained $1.38, or 2.33%, to trade at $60.62 per barrel.

Abnormally cold weather in Texas and the Plains states forced the shutdown of up to 4 million barrels per day (bpd) of crude production along with 21 billion cubic feet of natural gas output, analysts estimated.

Shale oil producers in the region could take at least two weeks to restart the more than 2 million barrels per day (bpd) of crude output affected, sources said, as frozen pipes and power supply interruptions slow their recovery.

“With three-quarters of fracking crews standing down, the likelihood of a fast resumption is low,” ANZ Research said in a note.

For the first time since November, U.S. drilling companies cut the number of oil rigs operating due to the cold and snow enveloping Texas, New Mexico and other energy-producing centres.

OPEC+ oil producers are set to meet on March 4, with sources saying the group is likely to ease curbs on supply after April given a recovery in prices, although any increase in output will likely be modest given lingering uncertainty over the pandemic.

“Saudi Arabia is eager to pursue yet higher prices in order to cover its social break-even expenses at around $80 a barrel while Russia is strongly focused on unwinding current cuts and getting back to normal production,” said SEB chief commodity analyst Bjarne Schieldrop.

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Crude Oil

Crude Oil Rose Above $65 Per Barrel as US Production Drop Due to Texas Weather

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Crude Oil Rose Above $65 Per Barrel as US Production Drop Due to Texas Weather

Oil prices rose to $65.47 per barrel on Thursday as crude oil production dropped in the US due to frigid Texas weather.

The unusual weather has left millions in the dark and forced oil producers to shut down production. According to reports, at least the winter blast has claimed 24 lives.

Brent crude oil gained $2 to $65.47 on Thursday morning before pulling back to $64.62 per barrel around 11:00 am Nigerian time.

U.S. West Texas Intermediate (WTI) crude rose 2.3 percent to settle at $61.74 per barrel.

“This has just sent us to the next level,” said Bob Yawger, director of energy futures at Mizuho in New York. “Crude oil WTI will probably max out somewhere pretty close to $65.65, refinery utilization rate will probably slide to somewhere around 76%,” Yawger said.

However, the report that Saudi Arabia plans to increase production in the coming months weighed on crude oil as it can be seen in the chart below.

Prince Abdulaziz bin Salman, Saudi Arabian Energy Minister, warned that it was too early to declare victory against the COVID-19 virus and that oil producers must remain “extremely cautious”.

“We are in a much better place than we were a year ago, but I must warn, once again, against complacency. The uncertainty is very high, and we have to be extremely cautious,” he told an energy industry event.

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