The war on Iran is on. And the ongoing US-China trade war is piling up pressure on the global economy. It is beginning to hurt economic growth and would ultimately shrink the crude demand growth, many are now asserting.

Both the Organisation of Petroleum Exporting Countries (Opec) and the International Energy Agency are warning that rising trade tensions pose a major downside risk to economic growth and consequently, the oil demand growth. Opec is clearly concerned about global trade tensions, pointing out, it weighed on crude prices in last month.

Oil demand in Asia’s key oil importers and fastest growing markets - China and India - has been increasing at a slower pace this year than before, and analysts expect trade tensions, emerging market currency weakness, and sanctions on Iran oil to further sour an already cautious investment sentiment.

Ominous clouds are thus visible on the global economic horizon. The Organisation for Economic Cooperation and Development’s composite leading indicator, which covers the western advanced economies plus China, India, Russia, Brazil, Indonesia and South Africa, peaked in January but has since fallen and slipped below trend in May and June.

World trade volume growth also peaked in January at almost 5.7 per cent year-on-year, but nearly halved to less than 3pc by May, according to the Netherlands Bureau for Economic Policy Analysis.

Stock markets are on the edge. Among the hardest hit, Turkey’s TUR ETF has tanked 50pc this year, China’s FXI ETF 12pc and Indonesia’s EIDO ETF 21pc. The emerging markets ETF tipped into a bear market last week after falling more than 20pc from its 52-week high set in January.

The crude world is not immune to all this!

The Iran factor is spicing up the overall scenario and politics seem to direct the show one way or the other. While the US is adamant to bring Iranian oil exports to at least near zero - if not absolute zero, China - a major buyer of Iranian crude — continues to insist that it would not stop buying Iranian crude.

Beijing, however, did make one concession to Washington: it agreed to keep its Iranian oil imports at current levels. Yet, this too may change as the trade war between the two intensifies, some believe.

In the given circumstances, there seems to be no danger of China suspending Iranian oil imports. Last week, the head of the international office of China Petroleum and Chemical Industry Federation Andrey Yu, was quoted as saying: “Chinese companies need Iranian oil in any circumstances and will continue to buy it.”

“China doesn’t pay attention to the US sanctions on Iran; it is a routine between Iran and China and has nothing to do with the US. Oil, gas and trade shouldn’t be influenced by the US anymore.”

He told Iranian news agency that Chinese and Russian companies can fill up the vacuum of Total and other European companies, so it is highly improbable that Iran has a problem in excavating and investing in oil.

“Iran has been able to keep progressing in the past decades despite the sanctions,” he said, adding that Iran and China can have closer ties. “Whatever, the US cannot impede the cooperation between the two countries.”

In the ongoing battle of nerves, Iran is also endeavouring hard to protect its market share. In the given circumstances, it needs to somehow hold on to its share. And Tehran is doing so by trying to lure its biggest buyers, China and India, offering discounts and lower prices to them, IRNA reported, quoting an anonymous source at the country’s oil ministry.

From a crude sales viewpoint, China is particularly important to Tehran. “If China buys Iran’s oil, we can resist the US, one Iranian analyst told the Financial Times last month. “China is the only country which can tell the US off.”

The IRNA report seconds an earlier Reuters story saying the National Iranian Oil Company had reduced oil prices for Asian clients by between $0.75 and $0.90 a barrel, with prices for Western clients down by $0.50 a barrel.

Interestingly, the trump card for Washington to win the battle against Iran, bring Tehran to its knees, isolate the country economically and politically, appears in the hands of Beijing and not President Trump. China, and not Trump, holds the key to this ongoing cat and mouse game!

Published in Dawn, August 19th, 2018

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