How Could The US-China Trade War Impact Crude Oil Prices?

by Trefis Team
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Crude oil had a great start to the year 2018. The commodity touched $80 per barrel for the first time in almost four years on the back of Organization of Petroleum Exporting Countries’ (OPEC) decision to extend the oil production quotas until end of 2018. Oil companies, such as Chevron (NYSE: CVX), benefited as prices rose. However, as the trade war between the US and China gets fierce, crude oil seems to be experiencing the pinch. Brent oil prices have been declining since the beginning of July, thanks to the implementation of the US tariffs on several billions of dollars worth of Chinese goods. Since China has also retaliated with a stringent tariff plan against the US imported goods, the tariff war is likely to become more intense in the coming months. Consequently, the markets foresee a potential economic slowdown that might dawn upon the Chinese market in the near term. Given that China is one of the key consumer of global oil, a downturn in its economy could hamper its demand for crude oil, causing oil prices to fall.

Currently, we forecast Brent oil prices to average at around $67 per barrel by the end of 2018. We have created an alternative scenario, wherein the Chinese demand for oil drops, causing the oil prices to fall. View this interactive dashboard for US-China Trade War and create your own forecast to suit your assumptions.

Increasing Supply Of Oil

Last month, the OPEC and its Non-OPEC allies had decided to finally ease-off the restrictions on their oil output that had been ongoing since January 2017. Since the cartel had been successful in boosting the oil prices ahead of their planned schedule (end of 2018), they decided to capitalize on the improved oil prices and support their deteriorating economies. Further, this was also a move to compensate for the loss of oil supply from US sanctions on Iran, erratic production from Libya, and financial crisis in Venezuela. While this will allow the OPEC to retain its market share in the global markets, it is likely to contribute to the miseries of the already oversupplied oil markets.

Besides the rise in output by the OPEC, the US oil producers continue to ramp up their output to gain from the recovery in oil prices. As of 6th July 2018, the US oil production had grown to an all-time high of 10.9 million barrels per day (bpd). This represents an increase of more than 25% in the US oil output since November 2016, when the OPEC had first announced their output cuts. As the US shale producers continue to expand their output, coupled with the OPEC’s incremental oil supply in the coming months, we expect crude oil markets to remain oversupplied.

Weaker Chinese Demand Could Worsen Things

The Trump administration has managed to implement what a number of previous US governments could not – a restrictive trade policy for Chinese products. On 6th July, the US government implemented varying tariffs on various imported Chinese products worth billions of dollar. In response, China also launched a similar tariff policy that makes the US imported products expensive to buy.

While the two countries have done this to encourage and protect the interests of their own people and economy, it is likely to have a detrimental effect on several industries in the near term. Crude oil, which is a globally traded commodity, has already experienced a plunge due to this ongoing trade war. Brent oil price, a global benchmark for oil prices which was trading around $79 per barrel at the beginning of the month, fell to $73 per barrel (a drop of almost 7%) as soon as the Chinese government retaliated with a tariff policy on the US imported goods.

As the trade war between the two countries becomes severe, the market expects China to experience a slowdown in the coming months. This because the US is one of the largest markets for Chinese products, and the newly implemented tariffs would lead to lower sales and employment in China. As a result, the consumption in the country will go down, causing the demand for oil to decline as well. Lower demand from one of the largest consumers of oil, coupled with the oversupply in the oil markets, is expected to result in a drop in oil prices.

View our interactive dashboard for US-China Trade War, where we depict how lower Chinese demand for oil will cause our crude oil price forecast to fall to $66 per barrel, as opposed to our base case estimate of $67 per barrel.

Do not agree with our forecast? Create your own price forecast for Brent oil price by changing the base inputs (blue dots) on our interactive dashboard.

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