A squeeze on oil demand is looming as a result of the U.S.-China trade war, a senior BP executive told Reuters. Acknowledging the bullish effect of U.S. sanctions on Iran in the short term, Janet Kong, BP’s chief executive of oil trading operations in Asia, said this effect will be short-lived as the market absorbs the shock and moves on to other concerns.
“Going into 2019, I worry about the impact of the U.S.-China trade war, manifesting itself slowly,” the executive said. “The trade war impact has not really shown up in the data anywhere, but it will show up gradually over time. So the supply shock is very sharp and prompt, while the impact from trade war is boiling over slowly.”
There have been voices warning that the trade war will affect oil demand as it affects economic growth in China, but official oil demand forecasts have yet to factor it in, it seems. OPEC’s latest Monthly Oil Market Report, however, did revise the cartel’s forecasts for oil demand in 2019 down by 20,000 bpd to 1.41 million bpd, warning that global economic growth may slow.
The International Energy Agency, on the other hand, has kept its 2019 demand forecast unchanged in the latest fundamentals update, at 1.5 million bpd, up from this year’s projected 1.4 million bpd. Yet the agency noted that demand could be stronger were it not for the trade war and signs of stalling economic growth in emerging economies. Related: $100 Oil Is A Distinct Possibility
While general economic growth patterns are dependent on a host of different factors, the U.S.-China trade war is outside the normal course of events and, according to Kong, likely to drag on for quite a while, which would extend the duration of its negative effect on oil prices.
“The Trump administration wants intellectual property protection,” Kong said. “... reducing subsidies to Chinese SOEs (state-owned enterprises) and open market access by all businesses which are difficult, in my view, for the Chinese government to agree to. So it’s very likely this war will drag on for a long time.”
By Irina Slav for Oilprice.com
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If China was hindered by rising US tariffs from selling $800-billion worth of goods annually in the US, it can sell them somewhere else as its economy is far more integrated than the US economy in the global trade system supported by its silk and belt road initiative. China’s oil imports which are the driver of global oil demand will therefore continue unabated.
The US may have to replace Chinese imports with more expensive imports from elsewhere. This will lead to rising costs for US customers, higher inflation, widening budget deficit and rising outstanding debts by at least 2.35%. In other words, the US will be the eventual loser in a full trade war with China.
In view of the above, the Trump administration will be forced to cut its losses by bringing to an end its escalating trade war with China since it could never win this war and reverse its sanctions on Turkey.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London