Oil drops as trade war concerns outweigh supply disruptions

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SINGAPORE (Reuters) – Oil prices fell on Wednesday on concerns the Sino-U.S. trade war could trigger a global economic downturn, but relatively tight supply amid OPEC output cuts and political tensions in the Middle East offered some support.

FILE PHOTO: Oil facilities are seen on Lake Maracaibo in Cabimas, Venezuela January 29, 2019. REUTERS/Isaac Urrutia

Front-month Brent crude futures, the international benchmark for oil prices, were at $69.60 a barrel at 0332 GMT, down 51 cents, or 0.7%, from the last session’s close.

U.S. West Texas Intermediate (WTI) crude futures were at $58.50 per barrel, down 64 cents, or 1.1%, from their last settlement.

“Crude oil was weak … primarily as the bears on demand are winning compared to the bulls on supply,” James Mick, managing director and energy portfolio manager with U.S. investment firm Tortoise, said in an investor podcast.

“Investors are concerned from a macro perspective about worldwide demand, particularly in the face of the growing trade dispute between the U.S. and China,” he said.

Fawad Razaqzada, analyst at futures brokerage Forex.com, said another concern was that “falls in emerging market currencies (are) making dollar-priced crude oil dearer to purchase in those nations” and that crude prices could fall back.

Despite the economic concerns, global oil demand is so far holding up well, likely averaging over 100 million barrels per day (bpd) this year for the first time, according to data from the U.S. Energy Information Administration (EIA).

But analysts are concerned that tightening credit amid the economic slowdown will hamper trading in commodities.

“We remain cautious regarding the short-term macroeconomic environment,” commodity brokerage Marex Spectron said in a note.

“Credit availability on the physical commodity markets is of particular concern.”

Eastport, a Singapore-based tanker brokerage, had similar concerns.

“An increase in caution and risk aversion could weigh on economic growth,” it said in a note on Wednesday.

Despite these concerns dragging on oil markets, crude prices remain relatively tight.

“Supply risks remain at elevated levels with continued geopolitical uncertainty in the Middle East, as well as Venezuela’s well-known struggles,” said Tortoise’s Mick.

Adding to this are ongoing supply cuts led by the Organization of the Petroleum Exporting Countries (OPEC) since the start of the year to prop up the market.

OPEC and some allies including Russia are due to meet in late June or early July to discuss output policy going forward.

Container trucks arrive at the Port of Long Beach on 23 August 2019 in Long Beach, California
Image copyrightGETTY IMAGES

The US is due to impose fresh tariffs on a range of Chinese goods, in a sharp escalation of a bruising trade war.

, while US President Donald Trump has tied protests in Hong Kong to a possible trade deal with China.

What is expected on 1 September?

The US is due to impose a 15% tariff on $300bn worth of Chinese goods by the end of the year in two rounds.

The first round of duties is due to be introduced on 1 September and analysts expect those tariffs will target imports worth about $150bn.

The Office of the United States Trade Representative would not clarify the value of goods due to be hit with tariffs this month.

Products to be targeted in September range from meat and cheese to pens and musical instruments.

The second wave of goods, subject to new duties from 15 December, includes clothing and footwear.

A woman shops for Chinese made shoes at a store in the Chinatown area of Los Angeles, California on August 24, 2019
Image copyrightGETTY IMAGES

The 15% rate supersedes the 10% originally planned and was announced last week as tensions between the two sides escalated.

China initially said it would retaliate with measures targeting $75bn of US goods, but later appeared to soften those comments.

On Thursday, Commerce Ministry spokesperson Gao Feng said China had “ample” means to retaliate against planned US tariffs while emphasising the need to de-escalate tensions.

“The most important thing at the moment is to create necessary conditions for both sides to continue negotiations,” he said in a briefing, according to Reuters.

How has industry reacted?

Mr Trump has repeatedly argued that China pays for tariffs, but many US companies have rebutted that claim.

More than 200 footwear firms – including Nike and Converse – said the new duties would add to existing tariffs of up to 67% on some shoes, driving up costs for consumers by $4bn each year.

It said the incoming tariffs on footwear “will also mean these massive tax increases hit tens of millions of Americans when they purchase shoes during the holiday season”.

The American Chamber of Commerce in China also voiced concerns after the US said it was going ahead with new tariffs.

“Our members have long been clear that tariffs are paid by consumers and harm business,” it said in a statement.

“We urge… that both sides work towards a sustainable agreement as soon as possible that resolves the fundamental, structural issues foreign businesses have long faced in China.”

What’s next?

In addition to imposing new tariffs, the Trump administration plans to raise the rates on existing duties from 25% to 30% on 1 October.

Mr Evans-Pritchard from Capital Economics said this rate could increase further still.

“The tariff rate could go all the way up to 45%,” he said. “Those are the goods that do the most damage to China and the least collateral damage to the US.”

Chart showing tariffs imposed by China and the US
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For the US and Chinese economies, analysts say the pressure created by tariffs is also building.

“The full-blown trade war, together with China’s retaliation in kind, could reduce potential US GDP growth in the short run by almost 1%,” says Gary Hufbauer of the Washington-based Peterson Institute for International Economics.

“The impact on China would be larger, as much as 5%.”

Saudi Aramco unveils next stage of blockbuster flotation

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An Aramco gas terminal

The world’s most profitable company has published more details about its planned stock market flotation.

Oil giant Saudi Aramco’s long-awaited prospectus said individual retail investors will have a chance to buy shares as well as big institutions.

But the 600-page prospectus did not say how much of the Saudi firm would be sold, nor the date of the listing.

It did, though, mention possible risks, including the government’s control over oil output and terrorist attack.

Crown Prince Mohammed bin Salman is seeking to sell the shares to raise billions of dollars to diversify the Saudi economy away from oil by investing in non-energy industries.

Bankers think the long-awaited flotation will value Aramco at $1.5-2 trillion, making the stock market listing the biggest ever.

The prospectus said up to 0.5% of the company would be set aside for retail savers, but Aramco had not yet decided on the percentage for larger institutional buyers.

After the flotation, Aramco will not list any more shares for six months, the prospectus says. Although one of the attractions for investors is the potential of high dividends, the document said Aramco has the right to change dividend policy without prior notice.

Aramco has hired a host of international banking giants including Citibank, Credit Suisse and HSBC as financial advisers to assess interest in the share sale and set a price. Based on the level of interest – a final value will be put on the shares on 5 December.

The sale of the company, first mooted four years ago, has been overshadowed by delays and criticism of corporate transparency at Saudi Arabia’s crown jewel.

It was initially thought about 5% of Aramco would be sold, but the final figure is now expected to be half that.

Amid speculation that some foreign institutional investors are cool on the flotation, the government has reportedly pressed wealthy Saudi business families and institutions to invest, and many nationalists have labelled it a patriotic duty.

Aramco last year posted $111bn in net profit. In the first nine months of this year, its net profit dropped 18% to $68bn.