Oil prices crashed on Thursday immediately after President Trump announced another round of tariffs on China.
...during the talks 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. This does not include the 250 Billion Dollars already Tariffed at 25%...
— Donald J. Trump (@realDonaldTrump) August 1, 2019
Trump said he would put a 10 percent tariff on the remaining $300 billion worth of Chinese imports that, to date, have not been covered by the levies. And the new tariffs, which Trump says will take effect on September 1, come in addition to the existing 25 percent tariffs on $250 billion of imports. In other words, at the start of next month, just about everything the U.S. imports from China will be subjected to tariffs.
Oil prices plunged by more than 8 percent immediately after the news, pushing WTI below $55 per barrel and Brent down to $61. The tariff announcement was ill-timed for the oil market, which was already heading south due to the disappointing result from the U.S. Federal Reserve. The central bank cut interest rates but warned that it wouldn’t mark the beginning of an extended period of enhanced monetary easing.
Also, while the oil market is tightening up just a bit, a recent wave of oil reports all forecasted an expected big supply surplus in 2020, which is the result of tepid demand growth at a time of surging supply. Related: The First Country To Abandon IMO 2020
The fragile economy and looming oil supply surplus will almost certainly be exacerbated by the escalation of the trade war. The breakdown in negotiations in May, which resulted in the hike of tariffs on the $250 billion tranche of goods from 10 to 25 percent did not go down well with financial markets. But traders took comfort in the fact that the U.S. and China appeared to agree not to escalate things further after Trump and Xi Jingping met in Japan in late June.
Which is exactly why Trump’s announcement on Thursday caught everyone by surprise. It may be a high-risk strategy by American negotiators to ratchet up the pressure in hopes of forcing China to make major concessions. By announcing a September 1 implementation date, Trump has given Beijing a month to stew on the matter.
But there is little evidence to suggest that China would buckle under the pressure. If anything, the Chinese government has dug in its heels, taking a firmer line the harder the U.S. pushes. With China’s economy slowing, Xi is certainly under pressure, but appearing weak by giving in to Trump’s demands is arguably a greater political risk than standing firm in letting tariffs go up.
As a result, the pitfalls for oil are growing.
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By Nick Cunningham of Oilprice.com
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He is well advised to cut his losses and end the trade war because it is hurting US economy far more than China’s as his own financial advisers admitted yesterday.
Nobody could rise to become the president of the world’s largest economy based on purchasing power parity (PPP) with authorities unmatched in any of the world democracies if one doesn’t have nerves of steel and the intellect to match. President Xi Jingping has emerged from all his meetings with President Trump with the upper hand. The latest meeting in Osaka during the G-20 summit is no exception
Still, a deal will be reached a short while before the presidential elections so that President Trump could ensure getting another term in the White House.
Meanwhile, the global economy continues to suffer the adverse impact of such a futile war.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School