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Trump’s China Trade War Hammering Oil Markets

As markets slide precipitously due to President Donald Trump’s salvo against China, Iran’s latest seizure of an Iraqi tanker in the Persian Gulf –the third such act in recent weeks – wasn’t enough to reverse the oil price free fall. Due to the dire prognoses of the future global economic slowdown, it appears that the only thing capable of rattling oil markets these days is the U.S. – China trade war.

Last week, President Trump tweeted that he was applying 10% tariffs on an additional $300 billion of Chinese goods which would come into effect on September 1st. Thursday’s announcement caused oil prices to sink by 8% with the stocks of oil producers also plummeting, some by more than 10%.

This was the largest single-day drop in oil prices in the past three years.

The Dow Jones and S&P 500 also fell, both by about 1% by Friday morning, in the wake of the announcement and further 600 points or 3% by Monday close of markets. Monday also saw price drops for Brent Crude and West Texas Intermediate (WTI) below $60 and $55 per barrel, respectively.

Crude is now at a six-week low with Bank of America warning that $30 per barrel could be over the horizon following China’s tough stance on sanctions. These are recessionary prices, if they occur.

Monday China allowed the yuan to depreciate to its lowest level relative to the dollar in the past 10 years, sending Trump fuming. A cheaper yuan means that Chinese goods will be even more competitive on the global stage against dollar-denominated U.S. goods. The U.S. Treasury has since officially labeled China a “Currency Manipulator” – an action it has not taken since the 1990s when China was also named.

Asian markets recoiled at the currency manipulator designation: South Korea’s Kospi index hit a three-year low at 1917.50, down 1.51% from Monday while the Japanese Nikkei closed Tuesday’s trading down 0.65%. China’s Shanghai Composite Index closed at 2,777.56, down 1.55% from Monday, while Hong Kong’s Hang Seng Index fell 0.67% to 25,976.24.

This is a far cry from the reprieve both sides agreed to at the G20 in Osaka last month, which resulted in the resumption of trade negotiations.

Effect on Global Growth and Oil Markets

The escalating trade war threatens the unprecedented economic growth the U.S. experienced since 2019 and the global economy at large. This has a direct impact on the demand for oil. Uncertainty makes it more difficult for companies to make investment decisions, hurting business. IMF economists estimated that the Sino-American trade war would shave off 0.3% of global GDP in 2020, along with the 0.2% from tariffs imposed last year, and that was before the new tariffs were announced.

China is the world’s largest importer and the second-largest consumer of oil after the U.S. As its economy slows, so too does its oil demand, which weighs-down global markets. At the same time, oil supply growth is expected to accelerate next year as U.S. production reaches record highs. Subsequently, analysts expect global supply to outpace demand in 2020 by over one million bpd. The increase in supply coupled with slowing demand will keep oil prices low despite ongoing supply disruptions in the Straits of Hormuz, Libya, and Venezuela.

No End in Sight?

The U.S.-China trade war is reaching new heights as U.S. oil production continues to shatter records and global oil demand growth slows. When the world’s two largest economies go head to head in a trade war, collateral damage is a certainty. For as long as it continues, oil producers will be among the victims – while oil consumers may benefit.
Source: Forbes

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