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Osama Rizvi

Osama Rizvi

Osama Rizvi is an economic and global oil market analyst who brings in a holistic point of view connecting geopolitics, economy and politics. He has…

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The Single Biggest Factor For Oil Price Forecasts

Trump and Xi will meet this Friday at the G20 summit to discuss the possibility of settling their dispute and putting an end to the on-going trade war. While it would be overly optimistic to expect the meeting to reverse the current economic downturn, it may well produce the positive sentiment required to halt the downward trend. Downside risks for oil prices due to the trade war remain undoubtedly high, with some commentators projecting $30 a barrel in the future.

The significance of these trade talks is understandable when one considers that China and the U.S. constitute almost 40 percent of global GDP and that almost 30 percent of GDP for both of these countries depends upon trade. China is also the world’s largest consumer of oil, with oil imports of 13.5 million barrels a day.

Ever since Trump launched an all-out trade war against China, concerns regarding global economic growth have been palpable. The latest gloomy estimates come from Bank of America Merill-Lynch. In an interview Francisco Blanch, the head of commodities for BofA, said that the chances of Trump imposing an additional $300 billion of tariffs remain high.

Citing concerns regarding the prospects of China devaluing its currency in order to help exporters and offset the losses from billions of dollars of tariffs, Blanch believes that the threat to oil demand remains high. Given the fact that China is the largest consumer of oil, the further devaluation of its currency would significantly add to its costs. To further add to bearish sentiment, Trump is planning to “punish” any countries that manipulate their currency.

(Click to enlarge)

The World Trade Organization’s Director-General, Roberto Azevedo, said that world trade is being hit by new trade restrictions at a “historically high level”. In this regard, Chinese economic health is particularly relevant. In certain categories, Chinese exports have already taken a hit of almost 26 percent. China is the world’s largest automotive market but it has been suffering a slowdown as sales have fallen by 16.4 percent on year on year basis. Related: Iran Says News Of Oil Reduced Exports is “Absolutely Wrong”

According to a story published in WSJ, some economists even believe that the slowdown may breach the government’s 6 percent level for economic growth. The recently released factory output data showed dismal numbers and trade figures were also discouraging. Exports and imports fell by 8.5 percent. Many analysts are concerned that without the necessary stimulus packages from the Chinese the situation could worsen. BofAML’s estimate for $30 oil seems to be in agreement with what the Russian energy minister said a few weeks ago. Citing a discrepancy between what was being produced and the expected demand Alexander Novak said oil prices could drop as low as $30.

The trade war remains one of the most important factors in determining the trajectory of prices in the coming months. All eyes are on the G20 summit, but it is unrealistic to expect anything more than an agreement to continue talks on the back of Trump and Xi’s meeting.

By Osama Rizvi for Oilprice.com

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