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Escalating trade war, global slowdown to weigh on oil prices

Monday, 05 August 2019 | 12:00

Oil prices are expected to remain under pressure in the short term due to escalating US-China trade war and a slowdown in the global economy, but would bounce back in last quarter of this year, experts say.

Analysts and energy experts said the renewed escalation of trade tensions between the world’s two largest economies threatens to heighten uncertainty on economic front, but it would eventually benefit the oil market.

Elaborating, they said the escalating trade war may push the US Federal Reserve towards more interest rate cuts which, in turn, would likely boost crude oil prices. The two benchmarks – Brent and WTI – are expected to trade above $60 and $50 a barrel, respectively, in the short-term period.

Oil prices gained about 3 per cent on Friday, a day after recording their biggest daily drop in several years on US President Donald Trump’s vow to impose more tariffs on Chinese imports. Brent crude futures for October delivery settled at $61.89 a barrel, up $1.39, or 2.30 per cent.

The global benchmark slid more than 7 per cent on Thursday, the steepest daily drop in more than three years.

WTI crude futures for September delivery settled at $55.66 a barrel, rising $1.71 or 3.17 per cent, after Thursday’s nearly 8 per cent plunge, the biggest loss in more than four years.

For the week, Brent lost about 2.7 per cent, while WTI shed about 1.2 per cent.

“The market is still digesting the impact of the tariffs on oil markets, but given China has been taking very little US crude year-to-date, we see little scope for the tariffs to directly impact market fundamentals,” RoboResearch Commodities Strategist Ryan Fitzmaurice said in a note.

Washington’s new tariffs on China, due to take effect on September 1, intensify the trade war between the world’s top two economies. Any resulting economic slowdown could hurt crude demand. In a note on Friday, Bank of America Merrill Lynch analysts said that global oil consumption growth is running at the weakest levels in nearly a decade.

“Protectionism has taken a big toll on global toll on global industrial activity; we estimate that the latest round of US tariff on China could weaken global oil demand by an additional 250,000 to 500,000 barrels per day.”

In another note, ANZ Research said oil prices had already been under pressure before the latest tariff announcement made by the US President Donald Trump, with weak US manufacturing data raising concerns about weak demand for oil.

Mihir Kapadia, chief executive officer of Sun Global Investments, said oil prices will remain under pressure due to uncertain economic outlook and geopolitical situation in the region.

“The economic outlook, which along with the situation in the Gulf, has seen oil prices struggle to advance. Although, growth in the US slowed less than expected, internationally the trade dispute with China has weighed heavily on the markets and economies,” Kapadia said.

Trump said he would impose a 10 per cent tariff on Chinese imports worth $300 billion and could raise tariffs further if China’s president, Xi Jinping, failed to move more quickly toward a trade deal. The announcement extends US tariffs to nearly all imported Chinese products.

China said it would not accept “intimidation or blackmail” and pledged countermeasures.

“The trade war is going to increase the odds dramatically that the Fed is going to have to cut rates again, maybe twice this year,” said Phil Flynn, an analyst at Price Futures Group in Chicago.

US crude oil exports surged 260,000 barrels per day in June to a monthly record of 3.16 million bpd as South Korea bought record volumes and China resumed purchases, data from the US Census Bureau showed.

China, once the top buyer of American crude, slashed its purchases last year as the trade war dragged on.

Total US oil demand in May fell 98,000bpd to 20.26 million bpd, data showed earlier this week.

“The oil market has been the highest hit asset around from the trade war and this only exacerbates the situation,” said John Kilduff, founding partner of Again Capital.

The market also watched the weekly US oil rig count, an indicator of future production, which fell for a fifth week in a row as most independent producers cut spending even though majors were still pushing ahead with investments in new drilling.
Source: Khaleej Times

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