Crude oil continued sliding today on the back of growing tensions between the United States and China and anticipation of a difficult OPEC+ meeting on Friday.
At the time of writing Brent crude was trading at US$75.04 a barrel, down 0.40 percent, with WTI down 1.25 percent to US$64.87 a barrel, after President Trump said he will consider imposing import tariffs on another US$200 billion worth of Chinese goods. The move followed Chinese retaliation against the Friday round of tariffs, which also included a 25-percent levy on U.S. crude oil, gas, and coal imports, among other goods and products.
Reuters reported yesterday that Chinese tariffs on U.S. oil will disrupt a business worth some US$1 billion monthly and will hurt U.S. producers in favor of OPEC and Russia. Iran could turn out to be a special beneficiary of the trade spat, which would undermine another line of President Trump’s foreign policy.
Yet oil’s fundamentals are also pressuring prices. S&P Platts quotes Goldman Sachs analysts as saying in a note to clients that oil prices have been pressured in the past three weeks, not just by geopolitical developments but also by weaker demand from emerging markets and rising inventories. Related: Iran Looks To Veto Saudi, Russian Oil Production Proposal
Indeed, shipping data recently showed oil in floating storage in Europe, for one, was at an 18-month high in May, at 12.9 million barrels. In Asia, oil in floating storage was 9.7 million barrels in the same month.
These updates certainly don’t work for prices as OPEC and Russia are about to meet on Friday and Saturday to discuss reversing the oil production cuts they agreed to in late 2016. There is staunch division within OPEC about the reversal, and the cartel risks breaking apart after this meeting if it fails to arrive at a consensus decision. Still, the consensus expectation is for a production rise following the meeting, which exerts its own pressure on oil pries and will continue doing so until at least Friday.
By Irina Slav for Oilprice.com
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This strengthens my belief that there is no justification whatsoever for a rise in OPEC production at this stage as the global oil market has not re-balanced completely and prices are still hovering around $74-%76 a barrel and not beyond $80 or higher where they should be if they to enable OPEC members to balance their budgets.
The claim that the oil market is calling for more supply is not true and is based on faulty assumptions. The first assumption is that the forthcoming US sanctions on Iran will cause a shortfall in Iran’s oil exports. This is not going to happen and Iran is not going to lose a single barrel of its oil exports. The second assumption is that Saudi Arabia wants to keep prices up for its Aramco IPO. This could not be further from the truth. While Saudi Arabia wants oil prices far above $80 in order to balance its budget, it has to all means and purposes shelved the IPO as it no longer needs the money from it. The third assumption that the market needs more oil supply to offset a possible collapse of Venezuelan oil production and a reduction in Libya’s is also not true. The oil market has already factored in long time ago a steeper decline in Venezuela’s oil production and erratic Libyan production.
By imposing tariffs on China in the first place and counter-retaliating against Chinese tariffs on American imports in response, President Trump could be intentionally escalating tensions with China and moving towards a real trade war with it.
President Trump seems to be having a spat with everybody who matters in the world from China, to Russia and from Germany to the European Union (EU) under his policy of “America First”. This shows how ill-considered his policy. Still a psychologist analysing President Trump’s almost daily spats with the world would say they are the actions of somebody seeking to keep his name in the news.
I have always maintained that the imposition of tariffs on Chinese goods could be the first shots in the petro-yuan/petrodollar war of attrition. If a trade war between China and the United States erupts, China will not run from a fight with the United States and will retaliate by imposing its own sanctions on US exports. And to punish the United States financially, China could also offload its holdings of US Treasury bills estimated at $1.3 trillion.
A confident China buoyed by the successful launching of its petro-yuan and an America enraged by the challenge to its petrodollar make a toxic combination for further escalation of tension between the United States and China and a potential full-blown trade war between them.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London