WTI fell below $60 per barrel for the first time in two months, dragged down by growing fears of a global economic slowdown.
Oil had been stuck between geopolitical risk and supply outages on the one hand, and the U.S.-China trade war and grim economic news on the other. Depending on the day, whichever concern seemed more pressing drove oil price movement.
For the time being at least, economic concerns seem to be winning out.
While the Trump administration announced higher tariffs on $250 billion worth of Chinese goods a few weeks ago, global financial markets seemingly thought there was a decent chance that the worst would be avoided and that the two sides would reach a deal.
However, the rhetoric on both sides has changed, with top American and Chinese officials digging in and striking a more nationalistic tone. The Trump administration has not only hiked tariffs, but has since taken a hardline on Huawei Technologies and is rumored to be drawing up sanctions on other Chinese companies.
For its part, China is beginning to steel itself, a sign that it won’t take the conflict lying down. “We are here at the starting point of the Long March to remember the time when the Red Army began its journey,” Xi said at a rally in Jiangxi province. “We are now embarking on a new Long March, and we must start all over again!” Only a few weeks ago, China was much more cautious in how it discussed its standoff with the U.S. The shift in language suggests that the trade war will be a protracted affair.
The higher tariffs – 25 percent on $200 billion of Chinese imports, and reciprocal tariffs on $60 billion of U.S. imports into China – is bad enough. A worse scenario awaits, however. Trump has threatened another round of tariffs, consisting of a 25 percent levy on a further $300 billion of Chinese imports, which would just about cover everything. Once seen as unthinkable, analysts at Nomura have made that scenario their baseline forecast and said the odds of such an outcome is roughly 65 percent, as Bloomberg notes.
“The U.S.-China relationship has moved further off track over the past two weeks after a period of what appeared, on the surface, to be steady progress towards reaching an admittedly narrow agreement,” Nomura analysts wrote. “We do not think the two sides will be able to get back to where they seemed to be in late April.” Related: Oil Tanks On Worst Day In Six Months
Oil markets have taken note. Oil prices fell sharply on Wednesday and WTI dipped below $60 per barrel during midday trading on Thursday. Crude is set for its worst week in six months.
In addition to trade fears are tangible cracks in the global economy. Global auto sales continue to slow and automakers around the world are slashing their payrolls. The latest was Ford, which just announced that it was laying off 7,000 people, or 10 percent of its white-collar workforce. In total, roughly 38,000 job cuts have been announced by carmakers around the world.
The gloomier outlook comes at a time when U.S. crude oil inventories continue to rise. Stocks jumped by another 4.7 million barrels last week, rising to their highest level in nearly two years. The increase in inventories is feeding the narrative that the oil market is not, in fact, under-supplied, despite a series of major supply outages around the world.
U.S. crude inventories should not necessarily be taken as gospel, however, especially since OPEC+ is watching closely. “It is misleading to look only at stock trends in the US when assessing the situation on the global oil market,” Commerzbank wrote in a note. “After all, stocks in the US are influenced considerably by US-specific factors such as the rise in domestic oil production and insufficient pipeline capacities. Consequently, WTI is still trading at a significant discount of nearly $10 as compared with Brent. What is more, the further rising US stocks could make Saudi Arabia even more reluctant to step up production.”
The sudden weakness in the economy and the oil market adds pressure on OPEC+ to keep its cuts in place in the second half of the year. Commerzbank said that price weakness is likely “temporary.”
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But precisely because U.S. inventory data is so closely watched, it may take inventory declines before everyone starts believing that the oil market is seriously tightening up. For now, economic gloom is taking hold.
By Nick Cunningham of Oilprice.com
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Therefore, it is of great significance that Chinese President Xi Jinping likened China’s determination to face down the United States in the trade war between them to the Red Army’s Long March which ended in the victory of the communists in China. What is President Jinping is telling President Trump is that China will never capitulate no matter how long the trade war takes.
Eventually President Trump will have to back down and end the trade war with China because the war is already costing the US economy far more than China’s. China’s economy is bigger and far more integrated in the global trade system than the United States thus being able to withstand the strains of the war far more than the United States’.
Still, the trade war between the two superpowers could be a game changer for the economic and geopolitical balance of power in the 21st century. The war is not about trade surplus and so-called malpractices by China. It is about the petro-yuan undermining the supremacy of the petrodollar and by extension the US financial system, Taiwan, refusal by China to comply with US sanctions against Iran, the new order in the 21st century, China’s overwhelming dominance in the Asia-Pacific region and its claiming of sovereignty over 90% of the South China Sea and above all the fear of the US losing its unipolar status.
Were China to be prevented by US tariffs from exporting some $800-bn worth of goods to the United States, it can sell them somewhere else. For the United States to replace cheap Chinese goods with more expensive imports from around the world will add more costs to American customers, raise domestic inflation and add 2.35% to the $22 trillion of US outstanding debts. Moreover, a continuation of the war is already harming the US oil and gas industry which employs 2% of the US work force. China is already shunning US crude oil while many US LNG projects could stall in the absence of Chinese finance and contracts.
And while the trade war is creating uncertainty in the global economy and depressing global oil demand and therefore prices, it will not affect China’s insatiable thirst for oil since China can find markets for its goods all over the world aided by its Road and Belt initiative and this needs a lot of oil to keep its economy functioning.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London