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.
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.
The US is due to impose fresh tariffs on a range of Chinese goods, in a sharp escalation of a bruising trade war.
What is expected on 1 September?
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.
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.”
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.”
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%.”