Oil prices dropped early on Monday, weighed down by persistent concerns about the pace of global economic growth, as traders and investors expect this week monetary policy decisions from central banks and the resumption of the U.S.-China trade talks.
As of 02:51 a.m. EDT on Monday, WTI Crude was trading down 0.21 percent at $56.08, while Brent Crude was down 0.43 percent at $63.10.
Concerns over the state of global economy, especially economic growth in the world’s top crude oil importer, China, continued to weigh on oil prices at the start of the week.
According to Reuters polls of more than 500 economists carried out between July 1 and 24, experts worry that the U.S.-China trade war will impact global economic growth more than previously expected despite clear signals from many major central banks, including the Fed, that they would cut rates and ease monetary policies.
More than 70 percent of 250 economists polled by Reuters now say a deeper global economic downturn is more likely, compared to around 50 percent in a similar poll in April.
Oil prices also reacted on Monday to Iran saying that its meeting with the remaining signatories to the nuclear deal—China, France, Germany, Russia, and the United Kingdom—was “constructive” and “discussions were good.”
“I cannot say that we resolved everything, I can say there are lots of commitments,” Reuters quoted Iranian official Abbas Araqchi as saying on Sunday.
Yet, Iran insists that the European signatories to the deal ensure there are no obstacles to Iran exporting its oil, even if the U.S. has now imposed strict sanctions without waivers on Iranian exports. Analysts don’t see this EU-Iran impasse regarding Iranian oil resolving soon.
Apart from the U.S. oil inventory reports, investors and traders will be looking at two other developments this week—the Fed’s two-day policy meeting in the middle of the week, at which it is expected to cut interest rates, and the resumption of the U.S.-China trade talks in Shanghai, for which expectations are low that any major breakthrough could emerge.
By Tsvetana Paraskova for Oilprice.com
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However, a settlement will have to be reached soon because President Trump realizes that the trade war is hurting the US economy far more than China’s. Two reasons for that. One is that China’s economy is 28% larger than America’s based on purchasing power parity (PPP). The second is that China’s economy is far more integrated into the global trade system than the United States’ thanks to the Belt and Road Initiative. China's economy can take more punishment that America's.
However, economists who have been polled by Reuters should neither underestimate the ability of the global economy to rejuvenate itself nor exaggerate the doom and gloom particularly when the fundamentals of the global economy are still robust with the global economy growing this year at 3.3% and China’s economy growing at an impressive 6.2%. This is a spectacular growth for the world’s largest economy when compared to the US economy's growth at 2%-2.5% and the European Union’s (EU) at 1.0%-1.5%. Therefore, there is no need for anybody to shed crocodile tears about a slowdown in the Chinese economy.
I have always maintained that the EU is a global economic giant but is geopolitically without teeth. When the US imposed new sanctions on Iran, the EU declared that it will not comply with the sanctions and that it will continue to trade with Iran and import Iranian crude oil. Yet Iran insists that the European signatories to the deal ensure there are no obstacles to Iran exporting its oil. This means that EU is not honouring its commitments and is therefore succumbing to pressure from the United States.
Still, I project that oil prices will surge to the $70s this year with any hint of a movement towards a settlement of the trade war.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London