Trump’s Latest Trade War Move Sends Oil Tanking

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Yves here. With the impeachment spectacle eating the news, other important developments are going by the wayside. It is intriguing that oil traders have blown off the Houthi drone attack, but maybe this is just trader short-termism plus the success of the Saudis in making repairs quickly.

By Nick Cunningham, an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon. Originally published at OilPrice

Oil prices fell again on Monday on waning hopes of a breakthrough in the U.S.-China trade war.

Late last week, Bloomberg reported that the Trump administration was considering more extreme measures aimed at China, including putting limits on American investments in China, de-listing some Chinese companies from American stock exchanges, as well as putting caps on the value of Chinese companies that managed index funds can hold in the U.S.

No decision has been made, but Bloomberg reported that President Trump gave the go-ahead to his advisers to explore some potential moves. Some China “hawks” have described the plans as a possible “financial decoupling” of the U.S. and Chinese economies.

In response to that press report, the Trump administration issued only a partial and qualified denial, according to Bloomberg. “The administration is not contemplating blocking Chinese companies from listing shares on U.S. stock exchanges at this time,” Treasury spokeswoman Monica Crowley said to Bloomberg, without addressing some of the other ideas allegedly put forward.

But Trump’s top trade adviser Peter Navarro seemed to hint at the fact that the administration was considering precisely those moves, while simultaneously calling the reports “fake news.”

“There’s some significant issues related to Chinese stocks listed on public exchanges,” he said on CNBC. “There’s some interesting and significant transparency issues with Chinese stocks, but that’s all I’m going to say, I’m not going to talk about what’s going on behind closed doors.”

The precise policy under consideration is not the main point. Rather, turning to restrictions on investment flows and other punitive measures would amount to yet another escalation in the trade war. It would severely undercut whatever slim goodwill has been built in recent weeks between the two countries, and it would make a breakthrough in trade talks infinitely harder.

Of course, it’s possible that the Trump administration is considering these maneuvers as a fallback plan in the event that the trade talks – scheduled to restart on October 10 and 11 – run aground once again. It’s also possible that the administration is signaling its intent to escalate as a way of exerting leverage, pressuring Beijing to cut a deal by hinting that painful reprisals are on the drawing board if China does not give in.

Either way, the markets interpreted the report as very negative for crude oil as it suggested diminished odds of a trade breakthrough.

For its part, China warned on Monday against any sort of “decoupling” of the world’s two largest economies.

Meanwhile, Saudi crown prince Mohammed bin Salman gave an interview to CBS’ 60 Minutes over the weekend in which he said that a hot war would result in a spike in oil prices, which would drag down the entire global economy. He was adamant that the world needs to deter Iran, but he said that he prefers a political solution to the dispute rather than a military one.

“The remarks by MBS help to alleviate immediate concerns around escalations in the Middle East, leaving the market to revert its focus to the economy,” BNP Paribas global oil strategist Harry Tchilinguirian told the Reuters Global Oil Forum.

Saudi oil production rebounded to 9.9 million barrels per day (mb/d) last week, according to Aramco. “On the 25th, yes, we reached that target of production,” Ibrahim Al-Buainain, CEO of the state-owned Saudi company said. “We produce depending on the market and depending on capacity, so actually we are a little bit higher than this.”

The Abqaiq attack has been all but forgotten by oil traders. Instead, focus has shifted back to the U.S.-China trade war. “Speculative financial investors (further) reduced their net long positions in Brent and WTI in the last reporting week, thereby contributing to the slide in oil prices,” Commerzbank wrote in a note on Monday.

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  1. PlutoniumKun

    It is very telling that the markets are so uninterested in the attacks on SA’s production capacity. In an odd sort of way, this must be very worrying for the Saudi’s as it shows they’ve lost their role as the keystone supplier in the markets. Quite simply now, the issue for oil price is demand, not supply – there seems plenty of slack in the production system to make up for a loss of several million bbd.

    But this is a double edged sword – constant downward pressure on prices is terrible for the Saudi’s, Iranians, Venezuelans and US frackers alike. But it seems low prices isn’t necessarily helping the worlds economy for all sorts of reasons. The fact that this isn’t providing a boost for China in particular shows just how weak many economies are deep down. When a combination of low oil prices and spare manufacturing plant production capacity is not showing itself as increased output, then something is very rotten.

  2. rjs

    production is not refining capacity…the Saudis are shipping sour crude on sweet crude contracts, which means that the Abqaiq refinery is still down…i’m no expert, but the photos of the damage didn’t look like anything that would be repaired soon…

    the upside for the US is that there’s now a surplus of sour crude, which we need to run our Gulf Coast refineries, and which we historically bought from Venezuela…to replace Venezuelan crude, we’ve been buying Russian Urals at a premium since late winter, and still not running those refineries at near the capacity they ran at in 2018…

  3. Tyronius

    SA is bluffing about their output and repairs schedules. It’s been reported that they’ve bought oil from other suppliers to fulfill their contacts and infrastructure takes time to rebuild. There is much that’s being hidden under the tent flap, including the recent Houthi attack that inflicted substantial casualties and took so many prisoners. More shoes will be dropping soon.

  4. jessica

    Perhaps the possible moves toward financial decoupling are not ploys for a trade war but are the real strategy itself. I have no idea what goes on in Trump’s mind, but these moves look as though he intends to end the economic alliance between the US and China or more precisely between US corporations and China.
    If so, then the point of the tariffs may be not to pressure China but to cut supply chains running from China to the US by using politics to make China an unreliable source for companies selling in the US.
    If this is what Trump is up to, much of the global oriented coastal educated population will see it as akin to racism in its stupidity and unforgivability, but those who have seen their local economies destroyed by plants closed in favor of production in China will see it from a quite different angle.

  5. Amit Chokshi

    Shale production is slowing down. Well productivity has peaked and the capital markets and investor attitudes are leading to a drop in future production that many macro level observers are not grasping. Capex is down 10-20pct per oilfield service cos and rig count is collapsing.

    NC has published on this but public cos and execs are having these expectations now materialize in earnings and commentary.

    This means oil as a whole will likely need to rise. If anything with weak PMIs in Europe and Asia for the last year and headline news re global slowdown it’s actually impressive that oil is not lower.

    Marc Edwards is CEO of Diamond Offshore which is an offshore driller and for the first time since before the oil collapse in 2014 sounded optimistic about oil. He ran Halliburton’s land services division and in 2016 contracted four new drill ships in that historically would get 600-700k day rates for 450k until 2022. He took flak for it cause of leaving money on the table but said things would be much worse which he was right about. I bring that up only because that attitude is unusual for public co execs and at the Barclays ceo energy conf around Labor Day he finally started to sound optimistic over the course of the next year.

    Could be interesting…

  6. divadab

    It’s negotiating strategy. Trumpian negotiating strategy.

    We’ll see. These are people with a high tolerance for chaos. BUT – the Trumpians know all too well they need to keep gas prices down. And politically the Dems just gave Trump a gift opening the Ukraine investigation – which IMHO is more likely to flush Biden and the Clintonites than harm Trump at all.

  7. Susan the other`

    bin Sawbones actually said he doesn’t want a war with Iran, he wants diplomacy? If SA can’t get their act together long enough to make ARAMCO look like a going concern which will be viable long into the future then all bets are off for SA.

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