Should China decide to defy the latest U.S. tariff threat by ramping up imports of Iranian crude oil in open defiance to the U.S. sanctions on Iran, oil prices could take a significant hit and plunge by as much as $20-$30 a barrel, according to Bank of America Merrill Lynch cited by CNBC.
Early on Monday, WTI Crude was down 1.28 percent at $54.95 at 08:10 a.m. EDT, and Brent Crude was down 1.24 percent at $61.12, as the renewed trade war rekindled fears of slowing global oil demand growth.
On Thursday last week, oil prices took a heavy hit after U.S. President Donald Trump said that the U.S.-China trade talks would continue in September, while the “U.S. will start, on September 1st, putting a small additional Tariff of 10% on the remaining 300 Billion Dollars of goods and products coming from China into our Country.”
China pledged to impose new “necessary countermeasures” to protect its interests after the latest tariff threat, saying that President Trump’s tariff announcement was “an irrational, irresponsible act,” according to Zhang Jun, the new Chinese ambassador to the United Nations, as carried by Reuters. Related: Consumers Aren’t Crazy About Electric Cars
China’s reaction to the additional U.S. tariffs could include China resuming oil purchases from Iran to undermine the U.S. sanctions policy and cushion some effects on the Chinese economy from the new tariffs, BofA Merrill Lynch says.
“While we retain our $60 a barrel Brent forecast for next year, we admit that a Chinese decision to reinitiate Iran crude purchases could send oil prices into a tailspin,” CNBC quoted BofA Merrill Lynch as saying in a note.
Beijing has never actually stopped buying Iranian oil after the U.S. removed all sanction waivers for Iran’s customers in early May. China, the single largest buyer of Iranian crude oil before the U.S. sanctions hit the Islamic Republic’s oil exports, continues to import oil from Iran, despite the ‘zero exports’ maximum pressure campaign of the United States. China has said that it wouldn’t comply with the U.S. sanctions on Iranian exports. Yet, Chinese oil imports from Iran are much lower than they were just a few months ago.
Last week, Iran called on China and other ‘friendly countries’, as it put it, to buy more crude oil from the Islamic Republic.
By Tsvetana Paraskova for Oilprice.com
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But China made it clear from day one that it doesn’t recognize US sanctions against Iran and will therefore continue to buy Iranian crude oil. As a matter of fact, China has never stopped buying Iranian crude even for one minute accounting for 31% of Iranian oil exports and defying the United States. Therefore, the claim that it will adversely affect oil prices is nonsense.
Moreover, if the trade war escalates further, China could decide to nullify the entire US sanction regime against Iran by buying the entire Iranian oil exports amounting to 2.125 million barrels a day (mbd) and paying for them in petro-yuan and thus openly defying the United States.
President Trump and his advisers know by now from their experience of the trade war that China will never run away and will fight back.
Almost two years ago President Trump started a trade war against China, lost it and now he doesn’t know how to end it without losing face. And losing face he will because he has no alternative but to end it on China’s terms otherwise it could affect his chances in the next presidential elections in 2020.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London