Trade war to keep oil prices in check, larger demand concerns seen in China

by MARK RAO

THE start of US-China trade tariffs is expected to contain crude oil prices, but longer-term growth concerns in China could prove a bigger constraint on oil demand.

Oanda Corp Asia-Pacific head of trading Stephen Innes said the overarching theme of a trade war between the world’s largest economies will keep a lid on oil prices.

“The US-China tariffs will keep topside prices contained as a possible trade war escalation will be negative for global growth, but there remains a lot of confusion in the markets,” he told The Malaysian Reserve.

US crude oil inventory build-up, supply disruptions in key producing markets and US President Donald Trump’s call for more OPEC-led production sent mixed signals across oil markets last week.

Washington also imposed its first round of tariffs last Friday, hitting US$34 billion (RM137.38 billion) worth of Chinese imports with a 25% tax. Beijing responded in kind by imposing 25% levies on US$34 billion worth of US goods into China.

US-led sanctions on Iran, coupled with supply disruptions in Libya, Venezuela and Canada, have helped support oil prices on recent dips, while the 1.2 million barrels increase in US crude oil inventory and Trump’s call for more OPEC production are pulling back prices.

A looming trade war between US and China, which could hit over US$500 billion worth of goods on either side, is creating uncertain global trade conditions, negatively impacting all markets including oil.

After reaching US$79.44 per barrel on June 29 this year, Brent crude oil prices traded lower at US$77.11 per barrel last Friday.

While markets initially predicted oil prices to trend comfortably above US$80 per barrel by the second half of this year, fears over a trade rift developing into a full-blown trade war have kept prices in check. Over the past month, Brent crude prices traded between a high and a low of US$79.44 and US$73.05 per barrel respectively.

Innes said while trade war conditions are harmful to the oil market, Chinese authorities continue to grapple with a pulling-back stimulus domestically.

“This is created by a staterun banking machine which operated with wanton disregard for risk management.

“Add in the prospects of an economic slowdown, escalating trade wars all wrapped in a shrinking population, it does suggest the biggest credit bubble in history is in danger of bursting,” he added.

Recent data coming out of China revealed a slowdown in retail and property sales domestically, coupled with the continued financial deleveraging campaign in the country, pointing to a potential economic slowdown in the world’s second-largest economy.

China is also the world’s largest demand market for oil, importing 8.4 million barrels per day (bpd) in 2017. A slowdown in China would thus hurt oil prices over the long term.

“China risk continues to be well underpriced from my chair and suggesting at a minimum that the yuan will resume trending higher as the markets continue to de-risk China,” Innes said.