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Trade Truce Sends Oil Prices Higher

Oil prices jumped to their highest point in more than a month, pushed higher by an OPEC+ deal and the ceasefire between Trump and Xi, at least for now.

The OPEC+ extension was largely baked into the market already, but oil prices were up sharply in early trading on Monday anyway, as traders appeared heartened by the group’s resolve to prevent a renewed surplus. However, it was arguably the handshake agreement between President Trump and Xi Jingping to restart trade negotiations that provided a stronger jolt to the oil market.

On the sidelines of the G20 summit, Trump and Xi met privately and agreed to work towards a deal. As a result, Trump agreed to hold off on new tariffs for the “time being.” Markets rejoiced that the standoff was not set to escalate at a time when the global economy appears to be weakening. U.S. stocks rallied to an all-time high.

“It’s the best outcome you could have expected given the scenario going into the weekend,” Ed Campbell, portfolio manager and managing director at QMA, said in a Bloomberg interview. “The rally on this news will probably be short-lived and then we’ll go back to worrying about very weak growth data.”

Pitfalls remain. The same chasm between the U.S. and China on trade has hardly changed. While restarting talks is hopeful, it’s very hard to see how they overcome their differences on big structural policies.

The political dynamic may also constrain both leaders. Trump is trapped between trying to present a tough approach towards China while also needing to avoid an economic slowdown, especially with the presidential campaign heating up. He will even face pressure from some in his own party. For instance, Senator Marco Rubio denounced Trump’s decision to back off sanctions on Chinese tech firm Huawei. Related: U.S. Accounts For 98% Of All Global Oil Production Growth

“If there is a deal that’s done that saves Huawei, within the national-security bureaucracy, the knives will be out,” James Green, a former Trump trade negotiator, told the Wall Street Journal.

If Trump is unable or unwilling to offer some concessions to Beijing, it will make his task of reaching an agreement trickier.

Meanwhile, Xi Jingping is also trapped. China’s economy is showing significant strain, with U.S. tariffs playing a major role. He needs to somehow head off a more dramatic deceleration in economic growth, while also not appearing to give in to American pressure. The unrest in Hong Kong may also heighten the stakes, leaving him little choice but to present strength.

Moreover, the increasingly hostile rhetoric in Chinese state-run media towards the U.S. suggests that the appetite in Beijing for offering trade concessions to the U.S. is shrinking.

That means that, despite the trade truce, the two sides could find themselves once again at odds in the coming months. In the meantime, the 25 percent tariff on $250 billion of Chinese imports will remain in place. Those tariffs were at 10 percent up until only recently. While Trump has decided to hold off on an additional in tariffs, the recent increase in tariffs will continue to exact a toll on both economies. In other words, headwinds from the trade war are not going away, despite the triumphal spin from the Trump administration about China agreeing to purchase huge volumes of farm products from U.S. farmers. “We will give them a list of things we want them to buy,” Trump said. Related: Shale Executive Sees “Another Round Of Bankruptcies” Looming

“Tariffs already implemented are holding back the global economy, and unresolved issues carry a great deal of uncertainty about the future,” IMF Director Christine Lagarde said. Recent data from Europe was not encouraging. A measure of manufacturing activity showed contraction, a worrying sign of a deepening slowdown.


In short, oil traders are pleased that the fight won’t get worse for now, even if there is no easing on tariffs. “It is good news for oil demand that the trade dispute between the US and China will not escalate further for the time being thanks to the Osaka truce. After all, the IEA had warned in its latest monthly report that a new round of punitive tariffs would throw its demand forecasts into disarray,” Commerzbank wrote in a note.

The delaying of the trade war, combined with the OPEC+ production cuts, could tighten up the market, the investment bank argues. “[T]he market looks set to be undersupplied in the second half of 2019 at the current rate of OPEC production. This is likely to lend buoyancy to oil prices, so we envisage a Brent price of $70 per barrel at year’s end,” Commerzbank said.

But that only assumes the economy doesn’t take a turn for the worse.

By Nick Cunningham of Oilprice.com

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