Crude markets have a lot on their plate and are left with little penchant now to go any further. The brewing US-China spat, the possibility of it blowing up into a full-fledged trade war, its impact on the state of global economy and the global crude demand continue to dominate global headlines. Yet, a number of other issues are also creeping up on the crude agenda.
The upcoming US embargo on Iranian oil exports, the possibility of Russian currency bubble, the emerging impact of the US-Turkey skirmishes, the worsening state of the Saudi-Canadian relations and the growing US crude output; all continue to haunt the global crude markets — one way or the other.
The mounting trade tension between Washington and Beijing is raising concerns that as a consequence, global economic growth could slow down, lowering the overall demand for crude oil. Already the July crude oil import of the world’s largest crude importer, China, is reportedly at the third-lowest level this year.
Investors have been monitoring the back-and-forth tariffs introduced by the US and China with concern, fearing that the trade spat could eventually hit global growth and crude consumption. In a tit-for-tat move last week, China threatened to slap a 25 per cent tariff on US goods. The move was in response to the Trump administration’s plan to slap the same tariff on an equal amount of Chinese imports in the coming weeks.
The list of goods on which tariffs are to be imposed by China were diesel, fuel oils and other petroleum products, including the US liquefied natural gas (LNG). China became the world’s second-biggest LNG importer in 2017, as it buys more gas in order to wean the country off dirty coal to reduce pollution.
Chinese refiners have already begun ratcheting down purchases of American oil and LNG. Already China’s biggest US crude oil buyer Sinopec has reportedly suspended US crude oil imports, Reuters reported. Crude markets reacted to these developments. Oil prices plunged 4pc to nearly 7-week low as the US-China trade tensions gathered momentum.
The downward spiral in the Iranian crude exports is also weighing in on the markets. The sanctions that went into effect earlier week are targeting Iran’s trade in US dollars. The second round, to come into effect on Nov 4, will directly target Iran’s petroleum industry.
Yet, its impacts are already being felt. Iranian oil exports are falling, touching their lowest in four months in July, S&P Global Platts estimated, as key buyers have started to curtail their purchases. Flows from Iran to China and India — its two key customers — remained high, but exports to South Korea, Europe fell steadily as these buyers began looking elsewhere.
New US sanctions on Russia to take effect later this month, banning the export of “sensitive” goods and technologies to the country could also begin to hurt Russian crude output. Russia depends on imported technology and equipment for much of its oil sector. The sanctions, particularly if Europe follows suit, could be damaging, as it would take time to switch over to Asian suppliers or develop a home-grown technology.
“New LNG, refinery, and petrochemical projects may be under threat,” Dmitry Marinchenko, oil and gas director at Fitch Ratings, told Bloomberg. “Oil production may (also) be affected on the more complicated projects.”
Global markets were also watching development in Turkey with concern. Analysts feel the relentless pressure on Turkish currency apparently was due to the growing diplomatic spat between Washington and Ankara over the detention of a US pastor in Turkey. Consequent to all this, the global GDP growth seems set to slow — across the globe.
“We’re starting to see the end of the synchronised global growth that has prevailed over the last two years,” Sara Potter, associate director at FactSet, analysing global markets was quoted as saying. “While the US economy remains strong, growth in Europe and Japan is moderating, and emerging markets are under increasing economic and financial market pressure.”
UBS analysts are of the view that if trade issue were to simply escalate from current levels, US economic growth would be 1pc lower, while global growth falls 42 basis points. In the more severe possibility of a trade war, on the other hand, 245 basis points are expected to be cut from US growth, while global growth would be expected to be 108 basis points lower.
Interestingly, non-fundamentals appear leading the global economy towards this whirlpool. And interestingly, in virtually all these cases, the US under Trump is contributing heavily to this upcoming global economic malfunction!
Published in Dawn, August 12th, 2018