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Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

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Trade War Looms Over Oil Markets

Stock exchanges

Oil prices, along with equities across the board, were dragged down on Monday over fears of a brewing trade war.

China announced $3 billion of tariffs on U.S. goods, including pork and recycled aluminum. The move came as a retaliation to the Trump administration’s 25 percent tariff on steel and aluminum imports. China’s tariff announcement on Monday sent global financial equities careening downwards, and the losses were likely magnified by President Trump’s Twitter attacks on Amazon, which sparked a selloff in tech stocks.

Fears of a global trade war are again on the rise. The worrying thing is that China’s tariff measures on Monday were somewhat narrow, and only came as retaliation to the steel/aluminum tariffs, not the $60 billion in tariffs the Trump administration announced more recently, which specifically targeted China.

Chinese officials reiterated a desire to avoid a trade war, but China might not hold its fire forever, and the government could be preparing a larger set of trade tariffs in response. In other words, there is a decent chance that the trade dispute continues to escalate.

That is bad news for oil prices. The case for oil going higher largely hinges on exceptionally strong demand scenarios for 2018. “Our latest forecast suggests that demand will grow by 1.7 million b/d in 2018, the fifth-highest this century,” WoodMac said in a recent note. A trade war would seriously upend that forecast. Related: Upstream Oil Investments Bounce Back

“The retaliation from China is concerning for energy markets,” said Michael Loewen, a commodities strategist at Scotiabank in Toronto, according to Bloomberg. “If a trade war occurs between these countries and it affects demand growth from emerging markets, that could be a big problem.”

Adding to the danger for oil prices is the fact that speculators have once again staked out an incredibly bullish position on oil futures. Hedge funds and other money managers have acquired a record in terms of net length in Brent futures, rising to 595,596 for the week ending on March 27, an increase of 34,388 from a week earlier. While that is a sign confidence in the trajectory of the oil market, it also exposes oil prices to a correction should sentiment turn bearish. As John Kemp of Reuters notes, the proportion of long to short bets has stretched to a record, exceeding 12:1.

Hedge funds and other money managers are all betting in the same direction. “That makes prices vulnerable to bad news,” Greg McKenna, chief market strategist at futures brokerage AxiTrader, told Reuters. He cited news that Russia increased production in March as an example of the type of market development that could upset the bullish sentiment and force a selloff.

Indeed, as has repeatedly occurred over the past several years, whenever investors build up positions in the futures market and take things a little too far, they tend to rush back in the other direction at the first sign of trouble. In fact, that occurred at the end of January when Brent surpassed $70 per barrel. The spike in financial volatility in early February led to an unraveling of positions and a sharp slide in oil prices. Related: The Petrodollar Isn’t Dead Yet

The danger for oil is that a possible trade war represents one such obvious threat to market sentiment. “The broader markets are struggling,” John Kilduff, a partner at Again Capital LLC, told Bloomberg. The oil market “is super long at the moment, so without a catalyst it will be hard for that length to stick around.”

This all stands in sharp contrast to a longer-term outlook for oil. Inventories are falling, OPEC is intent on keeping the production cuts through this year and into 2019, and plenty of geopolitical surprises could explode and take supply off the market. That means that there are very good reasons for why an oil price rally might occur later this year.

Yet, a trade war looms as a potential spoiler. And in the immediate future, anything that upsets bullish sentiment could lead to a price correction for oil, given all the lopsided speculative interest that could come undone.

By Nick Cunningham of Oilprice.com

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  • Mamdouh G Salameh on April 04 2018 said:
    A potential trade war between the United States and China is the last thing the global oil market needs.

    The United States was the one who started it by imposing tariffs against China. Nobody would expect China to bend the knee before President Trump and not retaliate. President Trump could end the tariffs saga by promising not to add new ones on China.

    If a trade war between China and the United States heats up, China will not only be using the petro-yuan to undermine the petrodollar but could also retaliate by offloading $1.3 trillion worth of treasury bills it is holding.

    I am of the opinion that the imposition of tariffs on China by President Trump is the first shots in a potential petro-yuan/petrodollar confrontation. But the global oil market estimated at $14 trillion is big enough to accommodate both the petrodollar and the petro-yuan leaving it up to the exporters of oil to determine which currency they want to use. This is far better than damaging the global economy by a trade war between the two titans, the United States and China.

    Another point is that we should not make a song and a dance with Russia increasing its crude oil production in March this year. One has to look at the average daily production in 2017 and also in January and February 2018 to judge as to whether Russia has been adhering to its promised production cut before starting to level accusations.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • John Brown on April 04 2018 said:
    Let the trade war with China Rip. Over the past 20 years its trade, the majority with the USA that has allowed China to have 10% growth rates. They have a massive trade surplus with the USA. so its China that will lose the most in a trade war. Let tens of million of Chinese used to growing wages from U.S. trade lose their jobs, and lets see how the Chinese Gov deals with massive growing UNEMPLOYMENT in China. Meanwhile the U.S. should broker favorable deals with the nation's surrounding China that China is trying to bully. Let them benefit for U.S. consumers desire for cheap imported products. Instead of buying from China lets buy from Thailand, Vietnam, Malaysia, Philippines, India. We are already so expanding that shouldn't be too difficult as we move everything out of China. It will have the added benefit of making those countries richer and stronger as China continues to bully them and make them slave states. And we could always bring some of those jobs home to the USA. China has been stealing the USA blind for 3 decades, and using our money to build up its military and threaten international shipping in the South China Sea, and support North Korea with its ballistic nukes. Now is as good as time as ever for China to decide to play by the rules or face the consequences.
  • PC on April 15 2018 said:
    It is China which will badly loose in case there is any trade war between USA and China. Why? here is the reason. USA has huge trade deficit with China. Any war with USA means huge loss for China. but another very important factor is that unlike past, USA is now world's biggest Oil exporter and they will compensate the small loss for trade war with China, with that of huge Oil export.Certainly, Chinese economic loss means gain for rest of the world as China at present is the biggest importer of Oil and in case China goes into recession, Oil demand will drastically come down which will make Oil cheaper and all importing Nations will get benefit though OPEC and their newly found Friends nation will again loose that includes Russia too.Why USA will not be looser simply because earlier, USA was a Net importer of Oil but now they are Exporting nation and USA least depends on Oil trade.

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