Oil prices fell earlier today after President Trump threatened to slap more tariffs on Chinese products, with West Texas Intermediate shedding almost a percentage point at the time of writing, to trade at US$63.02 a barrel and Brent changing hands for US$67.85 a barrel, down 0.70 percent.
President Trump yesterday told his trade administration to start working on additional tariffs worth another US$100 billion in Chinese goods in response to China's retaliation to the initial tariffs on US$50 billion worth of Chinese goods. The retaliation was equal to the initial size of the U.S. goods package, which President Trump called "unfair".
China did not waste any time in responding to the new threat, saying it "will follow suit to the end and at any cost, and will firmly attack, using new comprehensive countermeasures, to firmly defend the interest of the nation and its people."
The prospect of a trade war sent the U.S. stock market down again, but the effect on crude oil, although clearly there, was in fact limited thanks to strong tailwinds.
Earlier this week, a Bloomberg survey among energy analysts found crude oil production across OPEC had slumped by 170,000 bpd last month to 32.04 million bpd. This is the lowest daily production rate in the cartel since April 2017, when it pumped 31.9 million bpd. The driver behind the fall was Venezuela, where oil production dropped by 100,000 bpd last month. Related: 2018 Oil & Gas Projects To Break Even At $44 Per Barrel
OPEC's stated determination to stick to its production cut deal also served to curb the effect of the trade war news on oil prices, despite the rekindling of doubts that the deal might be cancelled earlier than December 2018 as tension between Saudi Arabia and OPEC co-member Iran deepens.
On the headwind side, U.S. crude oil production rose further last week, to 10.46 million bpd, but it failed to have a significant effect on prices as the news of tightening global supply outweighed the worry of a return to the glut on the back of booming U.S. production.
By Irina Slav for Oilprice.com
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Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry. More
Comments
Such a war, in my opinion, has less to do with alleged China’s unfair trade practices or US trade deficit and intellectual property theft as President Trump depicted it and more to do with China’s crude oil futures contract.
That is why the recent imposition of tariffs on Chinese exports could be viewed as the first shots in the petro-yuan/petrodollar war of attrition that could escalate far beyond a trade war unless it is stopped immediately.
China is not going to bend the knee before President Trump and will retaliate against any new set of tariffs imposed on it.
Soon President Trump will realize that he is heading into something far more dangerous that a trade war with China. That is the moment he will stop his trade war against China and accept the inevitable, namely, the petro-yuan is here to stay. Still, the global oil market estimated at $14 trillion is big enough to accommodate both the petro-yuan and the petrodollar. This is far better option than damaging the global economy and themselves by a trade war.
The fact that a rise in US oil production has failed to have a significant effect on prices is because the global oil market has long ago discounted announcements by the EIA, the API and the IEA about a draw or build in US oil and gasoline inventories or rises in US oil production.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London