Trade War Looms Over Oil Markets
Oil prices, along with equities across the board, were dragged down on Monday over fears of a brewing trade war.
China announced $3 billion of tariffs on U.S. goods, including pork and recycled aluminum. The move came as a retaliation to the Trump administration’s 25 percent tariff on steel and aluminum imports. China’s tariff announcement on Monday sent global financial equities careening downwards, and the losses were likely magnified by President Trump’s Twitter attacks on Amazon, which sparked a selloff in tech stocks.
Fears of a global trade war are again on the rise. The worrying thing is that China’s tariff measures on Monday were somewhat narrow, and only came as retaliation to the steel/aluminum tariffs, not the $60 billion in tariffs the Trump administration announced more recently, which specifically targeted China.
Chinese officials reiterated a desire to avoid a trade war, but China might not hold its fire forever, and the government could be preparing a larger set of trade tariffs in response. In other words, there is a decent chance that the trade dispute continues to escalate.
That is bad news for oil prices. The case for oil going higher largely hinges on exceptionally strong demand scenarios for 2018. “Our latest forecast suggests that demand will grow by 1.7 million b/d in 2018, the fifth-highest this century,” WoodMac said in a recent note. A trade war would seriously upend that forecast.
“The retaliation from China is concerning for energy markets,” said Michael Loewen, a commodities strategist at Scotiabank in Toronto, according to Bloomberg. “If a trade war occurs between these countries and it affects demand growth from emerging markets, that could be a big problem.”
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