Oil prices have broken new multi-month highs, but the next level up may largely depend on what happens between the U.S. and Chinese trade negotiations.
There have been conflicting reports in recent days. Oil prices fell back on news that China was resisting U.S. demands and digging in its heels, which the market interpreted as a bad sign for the outcome of a trade deal.
The two sides have gotten this far by hashing out the easy stuff. China agreed to buy more American energy and farm products, and the U.S. delayed tariffs and signaled a desire to end them. But the hard issues were always going to be difficult to overcome. These include intellectual property rights, access to the Chinese market for American firms, data-services, and other practices by the Chinese government that Washington views as unfair. On top of those specific issues, the two sides are arguing over how to enforce the deal, and how quickly to roll off the tariffs.
Trump has sounded an optimistic tone for weeks, which has raised expectations of a forthcoming deal. The U.S. has twice delayed the implementation of tariffs, citing progress in the negotiations. But Bloomberg reported that China has been pushing back because it feels that while it is making concessions, the U.S. side has been more non-committal.
Trump had floated a meeting with Xi at Mar-a-Lago at the end of March. That was pushed off until April and recently was pushed off again until June. Markets sank on the news and WTI stopped short of $60 per barrel. While oil has been rising as the supply/demand fundamentals tighten, the U.S.-China trade war looms large.
"The feel-good factor was dealt a blow yesterday in the form of resurfacing trade jitters," Stephen Brennock of PVM Oil Associates Ltd. wrote in a report. "Those putting their betting chips on an imminent price surge will also be eyeing a further downswing in U.S. petroleum stockpiles."
Related: Oil Prices Shoot Up On Large Inventory Draw
But one could put an optimistic spin on the trade talks as well. Trump's delay of tariffs is a sign that the U.S. does indeed feel that there is concrete progress in the negotiations.
More importantly, having come this far, there is a huge cost to bailing on the talks. Both sides are under pressure to reach a deal. The global economy is not growing as fast as it was last year, and Trump has an election around the corner. Farm country is facing its worst crisis since the 1980s, dragged down by Trump's trade war, a glut of supply, and most recently, horrific floods. Trump can ill-afford to devastate America's heartland once again, especially after having raised expectations over the last few weeks that a trade deal was imminent.
China's economy has also slowed dramatically and Xi faces his own domestic pressures.
Crucially, the two sides are engaging in a last-minute spring to wrap things up. The Wall Street Journal reported that high-level talks are set in the coming weeks with rounds in both Beijing and Washington, with the intention of reaching a deal by late April. "We're in the endgame," Myron Brilliant, executive vice president of the U.S. Chamber of Commerce, told the WSJ. For his part, the top U.S. trade negotiator Robert Lighthizer said that the two sides are "two or three weeks" away from a deal. Related: Morgan Stanley: Oil To Rise To $75 This Summer
The stakes are high. Oil prices have climbed roughly 30 percent since the start of the year, but would likely be derailed if a trade deal collapsed. The global economy has shown some signs of strain, including the inverted yield-curve, which has tended to precede economic recessions. The U.S. Federal Reserve has backed off its previous hawkish approach, which has taken pressure off of the global economy, but cannot ensure that the expansion continues indefinitely.
Because expectations of a successful trade deal have somewhat been factored into the market as the two countries have stepped up talks and delayed tariffs, an agreement and the removal of tariffs could have a smaller upside impact. The negative impact of a failed negotiation would be much more significant.
However, at a minimum, a successful outcome would remove one of the largest downside risks to the global economy and to oil prices.
By Nick Cunningham of Oilprice.com
More Top Reads From Oilprice.com:
Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon. More
Comments
And despite the delay, a deal will be reached because both sides want it. Both their economies have been adversely affected by the tariffs with the US economy suffering more simply because China’s economy is bigger and far more integrated in the global trade system than the United States’. The proof is that China’s economy is projected to grow this year by 6.6% as it did in 2018 compared with some 2.5%-3.0% for the US and 2% for the European Union (EU). Moreover, China’s crude oil imports hit their highest record in January and February reaching 10.4 million barrels a day (mbd) and are projected to reach 11 mbd this year. This is certainly not a sign of a slowing economy.
Moreover, President Trump has an election around the corner and can, therefore, ill-afford to let the trade war devastate the farming states in America’s heartland where he draws a lot of support.
Another factor is that China will never put its name to any agreement that allows President Trump to claim victory. It will just walk away from the negotiations.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London