How Is the US-China Trade War Affecting Oil?

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How Is the US-China Trade War Affecting Oil?

 

How Is the US-China Trade War Affecting Oil?

The greatest impact of the United States-China trade war on the global oil industry is its effect on oil prices, explains Steve Wood, a managing director at financial services company Moody’s.

“The market is concerned that a prolonged dispute will result in slower global economic growth leading to lower demand for oil,” Wood told Rigzone.

“This, in turn, has caused oil prices to weaken, which reduces cash flow and earnings for oil producers,” he added.

Given the current considerations on the supply side, the oil market should have seen risk premium pushing up oil prices, according to Rystad Energy Senior Analyst Artyom Tchen.

“Instead we haven’t seen that over the last month,” Tchen said.

“We believe that [the] United States-China trade war and resulting weak economic growth sentiment is among those factors that balance supply risks and cap oil prices,” the Rystad Energy representative added.

Already introduced tariffs, excluding the latest U.S. round on $200 billion worth of Chinese goods and Chinese retaliation on $60 billion worth of U.S. goods, have dented oil demand growth this year by around 150,000 to 200,000 bpd, according to Rystad Energy estimates.

“We forecast 2019 demand growth at 1.2 million barrels per day (bpd), as opposed to [a] pre-trade-war forecast of 1.4 million bpd,” Tchen stated.

What Would a US-China Trade Deal Mean for Oil?

A deal would certainly help to stabilize things, according to Michael Burns, an oil and gas partner at law firm Ashurst.

“There are obviously other uncertainties and complications … but getting the United States-China conflict resolved would eliminate at least one destabilizing factor,” he told Rigzone.

Moody’s Wood said a trade deal would remove the overhang of weaker global economic growth from the market. This would provide support to oil prices leading to higher cash flow and earnings for the industry, Wood added.

Rystad Energy’s Tchen highlighted that new rounds of tariffs, that could include direct oil-related tariffs, would be avoided with a United States-China trade deal.

“These could result in increased tightness, oil price volatility and [a] wider WTI-Brent differential,” Tchen told Rigzone.

The Rystad Energy representative also expressed that a deal would help avoid further demand growth declines caused by the latest $260 billion worth of reciprocal tariffs and provide a sentiment relief to the oil price from the demand side.

 

Will There be a US-China Trade Deal?

Logic suggests that there will be a deal, according to Burns, who said the United States has “much to lose” if there is a drop in the oil price.

Burns added however that, given how “politically charged” the situation is, it’s “hard” to make any credible predictions.

Rystad Energy refused to speculate on whether there would be a trade deal between the United States and China. Moody’s also chose not to predict whether or not there would be a trade deal.

Kaho Yu, a senior Asia analyst at global risk consultancy Verisk Maplecroft, said a ceasefire would shift the wind in the United States-China dialogue back towards commercial opportunities in the oil industry but added that this would likely be temporary.

“Geopolitics are dynamic, and the United States-China relationship can quickly change,” Yu stated.

“We expect geopolitical tensions between Washington and Beijing to last regardless of whether a trade deal is reached,” the Verisk Maplecroft representative added.

Last month, U.S. President Donald Trump announced on Twitter that the United States would make a deal with China “when the time is right”.

“My respect and friendship with President Xi is unlimited but, as I have told him many times before, this must be a great deal for the United States or it just doesn’t make any sense,” Trump said in the Twitter statement.

 

When the time is right we will make a deal with China. My respect and friendship with President Xi is unlimited but, as I have told him many times before, this must be a great deal for the United States or it just doesn’t make any sense. We have to be allowed to make up some.....

— Donald J. Trump (@realDonaldTrump) May 14, 2019