The following article was written by Reem Aboul Hosn, Research and Market Analyst Officer at Credit Financier Invest (CFI) Ltd.
What triggered the sell-off in Oil prices earlier this week? One possible response is the impact of US policies on markets, and concerns about growth in global trade.
In the latest escalating U.S.-China trade dispute, the Trump administration proposed 25% tariffs on approximately USD 60 billion worth of imports from China to protest Beijing’s so-called “theft” of U.S. technology.
In retaliation, China increased tariffs up to 25% on 128 US imported products which fired up a spark of trade war between two of the world’s biggest economies.
China’s harsh reaction to US tariffs, resulted in large US companies criticizing President Trump’s approach and raising fears the long period of sustained growth could be coming to an end.
Concerns of a trade war accelerated as China struck back at the U.S.
The U.S. deficit with China in goods trade has grown substantially over roughly two decades. In 2010 the deficit was USD 273 billion and grew to USD 336 billion in 2017, according to the U.S. International Trade Commission. The impact of trade war on the overall US trade deficit is not that clear. In 2017m, US Oil net exports to China averaged around 435,000 b/d, a 140% increase from 2016. To reduce the deficit, Trump administration needs to push back on Chinese move to impose tariffs on energy trade. If left unrestricted, US net Oil flows to China are likely to increase, as US crude is pricing competitively in Asia and the US does not have spare refining capacity to absorb domestic supply increases.
Despite the recent uncertainty, a decline in Oil reserves in the US has been the primary driver of stronger Oil prices over the last 8 to 12 months. US Oil reserves are now below five-year average of 2013-2018 for this time of year also, OECD reserves are close to the five-year average.
Previously analysts believed the end of the OPEC agreement would mean supply came back on line quickly to flood the physical market, weighing on prices. However, the balance of risks suggests OPEC can maintain discipline and now the market is expected to be kept in balance. In review, the global deal to restrict Oil output has removed 85% of oversupply problem, according to UAE Energy Minister Suhail Al Mazrouei he said that the world economy is benefiting from the cuts and the Oil market will not be affected directly by the trade war. Al Mazrouei added that the trade war may affect the cost of drilling, the cost of completion, but he thinks overall the effect is going to be minor to the Oil prices”.
Market reaction to the retaliatory measure was swift, the S&P 500 index fell 1.7% after it dropped 2.2% on April 2nd. While Dow Jones Industrial Average dropped 1.7%. US Crude Oil lost 18 cents to USD 63.33 a barrel on the New York Mercantile Exchange. While Brent crude, fell 21 cents to USD 67.91 a barrel in London.