US-China trade tensions pose downside risk for oil prices

The ongoing trade dispute between the US and China would place “significant pressure” on oil prices and negatively affect global growth, Jadwa Investment said in a recent report.

In the latest development in US-China trade tensions, President Donald Trump on Friday said he was prepared to impose tariffs on all $500 billion of imported goods from China, threatening to escalate the trade dispute that has rattled markets worldwide. 

Earlier this month, the US introduced a second round of tariffs covering more than 250 Chinese products.

Tariffs on Chinese goods had previously included boats, aircraft engines, nuclear reactors and other industrial and agricultural machinery, as part of a wide-ranging list of 818 types of product.

“Currently, the lingering fear is that the Chinese government may retaliate to US’s tariff measures, leading to tit-for-tat trade dispute between the two largest economies, and oil consumers, in the world,” Jadwa Investment said.

“Such a fallout would have inevitable negative effects on global growth, and would put significant pressure on the oil prices, especially [if] OPEC and non-OPEC countries raise output and the US potentially releases some of its SPR,” it added.

Crude oil prices have already been under pressure at the start of Q3 2018 due to the combination of renewed trade tensions between the US and China and rising oil output from OPEC/non-OPEC and the US.

Looking ahead, while supply factors were responsible for higher oil prices in the second quarter, the demand side could play a bigger role in prices during the rest of the year, directly as a result of trade tensions, the report said.

“That said, any improvement in trade tensions would pull prices back towards the supply side, which could result in Brent prices rebounding above $75 per barrel mark,” Jadwa Investment noted.

The investment bank maintained its recently revised Brent oil price forecast of $68/barrel for 2018, citing uncertainty linked to trade tensions, and rising supply from OPEC/non-OPEC and US, together with the possibility of SPR releases from the US.