This is how a trade war could crush oil demand: report

It’s a sad fact, that for some, war can be good for business, as it increases demand for oil. However, a trade war is different because it could lead large parts of the economy to take flak, as well as to a currency war, Bloomberg has said in a new report.

The global oil market has recently suffered due to the impact of existing tariffs. However, it has held up amid other bearish factors, such as higher Saudi output and a potential pre-midterms release from the Strategic Petroleum Reserve. So far, the market has not been hit as hard as other commodities, such as copper or aluminum.

Escalation of a trade war, however, could change everything.

China’s threat to levy tariffs on some US energy exports arises from: first, the widening pool of tariff-targeted Chinese exports to the US; second, the more limited pool of trade going the other way for China to hit. Finally, a desire to take a symbolic swipe at Trump’s stated desire for “energy dominance.”

China accounted for 20 percent of US crude-oil exports in the 12 months ending in April and has been the largest market for them this year, according to the International Energy Agency (IEA).

Some expect China’s decision to impose tariffs on US crude exports to have zero effect. China would buy less US oil, but would then buy it from elsewhere. Accordingly, other countries, in turn, will buy the American oil now going begging.

In addition, the light oil derived from US tight-rock basins might find buyers in Asia, and European refiners might take conventional barrels if re-imposed US sanctions choke off Iranian exports, according to Kristine Petrosyan, a senior analyst at the IEA.

Pricing would have to be right, though, “so the net effect is not quite zero,” Petrosyan said.

Meanwhile, China accounts for about 30 percent of expected global oil demand growth this year and next. There are some reasons for concern, such as the rise in the country’s exports of diesel - a fuel tied most closely with industrial activity and freight.

The Asian country’s diesel exports increased by 27 percent year-on-year in H1 2018.

This may reflect that the first-half tighter credit will loosen in the back half, especially if trade battles bite. Yet, a bigger trade war clearly would represent a threat to China’s diesel demand at a time when gasoline demand growth is coming under pressure from prices around the world.

There is at least hope for now that a bigger war with Europe might be avoided, as Wednesday’s talks at the White House represent a truce, not a final peace agreement. But, opposition to unfair trade and a tendency for sudden moves remain defining features of the Trump administration.