Oil enters bearish territory as Brent remains below $60

Latest escalation between the US and China has led to a rout in global stocks and commodities

epa06417398 An oil drilling rig is seen off the Pacific Ocean coastline after the Trump administration announced plans to dramatically expand offshore drilling Seal Beach, California, USA, 04 January 2018. The proposal would allow for drilling in most US coastal waters.  EPA/EUGENE GARCIA
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Oil remained below $60 as gloomy economic sentiment caused by fears of a sustained trade war dampened markets.

Brent, the benchmark for light, sweet crude, was trading at a seven-month low of $58.62 per barrel at 2.13pm UAE time on Wednesday as markets reacted with anxiety to US President Donald Trump’s levy of an additional 10 per cent tax on $300 billion (Dh1.1 trillion) worth of Chinese imports.

Brent, which has hovered in a tight band of between $60 and $70 per barrel over the past two months, entered bearish territory with the announcement of fresh tariffs against China, which caused a rout in global stocks and commodities.

The US move to slap additional tariffs on top of a 25 per cent tax on Chinese imports caused the West Texas Intermediate benchmark to plunge to its worst single-day performance in four and half years on Thursday and saw Brent lose 7 per cent of its value the same day.

The lull in demand caused by the trade war between the world’s two biggest economies had earlier made the markets immune to rising tensions in the Middle East. Several tankers transiting the Strait of Hormuz, the passageway for a third of the world’s seaborne oil, have come under attack since May. On Sunday, a third vessel was seized by Iran on charges of abetting fuel smuggling in the region. However, oil prices were relatively unscathed by geopolitical tensions as trade war-induced low demand kept prices in check.

"Market participants expect these developments to hurt oil demand growth; the escalation in US-China tensions could hurt economic growth [and therefore oil demand growth], while the weaker CNY [yuan] will make oil purchases more expensive in domestic currency [China is the world's second-largest oil consumer],” Giovanni Staunovo, commodity analyst at UBS said in a recent note.

The Swiss lender expects lower demand growth to result in a less undersupplied market this year, with a more oversupplied one seen in 2020. Output from Saudi Arabia, which is part of the Opec+ coalition to cut back 1.2 million barrels per day (bpd) until next March, also declined to a five-year low of 9.6 million bpd last month, while Russian production fell marginally, compared with June.

Global stocks and commodities have proven particularly susceptible to the historic slide in the yuan to below the key threshold of 7 to the dollar last week. The sharp depreciation prompted the US Treasury to label China a currency manipulator. The People’s Bank of China then moved to ease tensions by fixing its currency at a higher midpoint to the dollar but this has done little to ease anxiety in the oil markets, which fear a sustained showdown between the two countries.

China, which stopped purchases of US agricultural products in response to the latest White House move against the country, has gone after the US hydrocarbons industry. In September, China, the world’s second-biggest buyer of liquefied natural gas slapped a 10 per cent tax on imports of the super-chilled fuel from the US. It raised the tariff to 25 per cent this June.

Fitch Solutions observed in a recent note that the measure has already impacted US imports. In 2017, flows to China accounted for 30 per cent of total US exports, however, in the first five months of 2019 they averaged a mere 2 per cent, having fallen 76 per cent year-on-year, according to the agency’s estimates.