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Despite a surprise crude oil inventory draw that the American Petroleum Institute (API) reported on Tuesday, oil prices fell by 2 percent early on Wednesday as the trade war between the United States and China continues to escalate and to weigh on both oil and equities.
At 9:26 a.m. EDT on Wednesday and before the EIA’s weekly inventory report, WTI Crude was down 2.14% to $62.15 and Brent Crude was down 1.97% at $66.78.
With China and the U.S. announcing new tariffs on the other’s products by the day, and investors seeking asset classes safer than equities and oil, the market could “look past” any U.S. crude oil inventory data, Harry Tchilinguirian, global head of commodity markets strategy at BNP Paribas, told MarketWatch on Wednesday.
“There’s a sea of red on the equity screens, and oil, as a risk asset, is falling as well,” he said.
This week, China imposed tariffs on 128 U.S. products, including steel and alloy pipe for oil and gas, effective Monday, in a retaliatory move after the U.S. imposed tariffs on imported steel and aluminum.
On Tuesday, the Office of the U.S. Trade Representative (USTR) published a proposed list of products imported from China that could be subject to additional tariffs, “as part of the U.S. response to China’s unfair trade practices related to the forced transfer of U.S. technology and intellectual property.”
Related: Investors Reward Big Oil’s Frugality
The proposed tariffs include products from sectors such as information technology, communication technology, robotics, and aerospace. China retaliated to this by announcing new tariffs on 106 U.S. products, including cars, chemicals, and soy.
U.S. President Donald Trump tweeted early Wednesday “We are not in a trade war with China, that war was lost many years ago by the foolish, or incompetent, people who represented the U.S. Now we have a Trade Deficit of $500 Billion a year, with Intellectual Property Theft of another $300 Billion. We cannot let this continue!”.
Analysts and market participants fear that global oil demand growth in emerging markets could suffer significantly from a trade war, and sentiment toward oil could really sour if more investors flee to safer assets.
By Tsvetana Paraskova for Oilprice.com
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Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews.
Such a war has, in my opinion, less to do with China’s unfair trade practices or US trade deficit and intellectual property theft as President Trump depicted it and more to do with the launch of China’s crude oi 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 into a trade war between the two countries and a possible wider conflict beyond.
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.
There are good reasons, however, why a confrontation between China and the United States might not be permitted to escalate. Both great powers are aware that they risk losing so much from any conflict between them. And it will be more difficult to contain the aftermath of any new accident between them. In time, President Trump will realize that China will not bend the knee before him and stop his trade war against China and,above all, let the petro-yuan and the petrodollar find their niches in a global oil market big enough ($14 trillion) to accommodate both of them This is far better than damaging the global economy and themselves by a trade war.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London