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Tim Daiss

Tim Daiss

I'm an oil markets analyst, journalist and author that has been working out of the Asia-Pacific region for 12 years. I’ve covered oil, energy markets…

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The Bearish Case For Oil

Bears

A relatively new development in global oil markets has unfolded in recent months, one that has replaced another new development that also has the ability to also roil oil markets. Renewed concerns of a heightened trade war between Washington and Beijing are bringing more pressure on global oil markets than the impending removal of more than 1 million barrels per day (bpd) of Iranian oil due to fresh U.S. sanctions, ushering in two market movers that traders did not have to wrestle with just a few months ago. Iran is OPEC’s third largest crude oil producer.

On Friday, global oil bench mark Brent crude fell 35 cents to settle at $77.42 per barrel, while NYMEX-traded U.S. benchmark West Texas Intermediate (WTI) was down 45 cents for the day to settle at $69.80 per barrel.

Granted, oil closed the month of August higher, with Brent up 4.3 percent for the month, and WTI up 1.5 percent, but going forward, those gains could be pared by growing trade war concerns and economic fallout from increased tariffs between the world’s two largest economies.

President Trump will likely move ahead this week with more duties for Beijing, putting in place another $200 billion in tariffs on Chinese goods, Bloomberg reported on Friday, citing six people familiar with the matter. The move would mean that around 50 percent of Chinese exports to the U.S. would be subject to extra duties.

Companies and the public have until September 6 to submit comments on the extra proposed tariffs before the president puts them in place. The administration could levy the new duties all at once or put them in place in stages. Beijing, for its part, has threatened to retaliate with $60 billion worth of new duties on U.S. imports to China. Related: The Biggest Threat To The Oil And Gas Industry

Trump has threatened to up the ante even more, stating recently that he’s ready to put new tariffs on all $505 billion worth of Chinese products imported to the U.S. The problem for China is manifold since it simply can't go toe to toe with the U.S. in a retaliatory tit-for-tat fashion since the U.S. imports nearly five times the dollar value in goods from China than China imports from the U.S. According to the U.S. Census Bureau, China imported only $129.9 billion in U.S. goods last year compared to some $505 billion the U.S. imported from China.

Beijing’s precision strike

Obviously aware of its limited ability to directly confront Washington over tariffs in the long term likely caused Beijing to threaten a 25 percent tariff on U.S. Liquefied natural gas (LNG) imports. In other words, what Beijing can’t do on a macro scale is a precision strike at an industry integral for Trump politically, as well as hitting a key U.S. sector that will need not only Chinese financing to get new LNG projects approved but also one that will need long-term off-take deals signed by Chinese firms.

However, the ongoing trade dispute, or what can now arguably be called a trade war, will continue to impact global oil markets perhaps long after the impact of U.S. sanctions against Iran are factored into global oil prices.

Commenting on Friday’s fall in both Brent and WTI prices, Jim Ritterbusch, president of Ritterbusch and Associates, said in a note that “[oil] appears to be following equities lower amidst renewed U.S./Chinese tariff concerns that could easily escalate in slowing global economic growth and, hence, world oil demand.”

Related: Saudi Oil Income Could Reach $161B This Year

This possible slowing in global economic growth and corresponding dip in world oil demand could offset the loss of Iranian oil as well as the continual loss of Venezuelan production and other marginal OPEC members, helping keep the market in balance. But this will also likely keep the price of Brent and possibly even WTI largely in check with corresponding lower gas prices at the pump - good news for Trump as crucial mid-term November elections approach and even better news if the trade quagmire continues well into next year as the 2020 presidential season kicks off.

Conversely, an ongoing trade war will not only hurt global and domestic economic growth, but continue to impact key supporters of the president, particularity farmers. Increased tariffs on Chinese imports will also increase the prices American consumers pay for a wide array of once cheap goods. Tariffs will also continue to hurt China’s economic growth thus also reigning in some of its oil consumption/demand.

In short, while renewed sanctions against Iran, which kicked in last month, are largely factored into the price of oil, and more sanctions leveled directly against Iran’s energy sector to hit on November 4 seem to be already factored in, trade tensions and lower economic growth and weakened oil demand have yet to run their full course. When, and particularly, how trade tensions will end is anybody’s guess at this point.

By Tim Daiss for Oilprice.com

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