Crude Prices Drop Again on U.S./China Tensions as Global Recession is Predicted

Monday August 5, 2019

U.S./China trade war worries once again negatively impacted global equities on Monday, following U.S. president Donald Trump's vow last week to impose a 10 percent tariff on $300 billion of Chinese imports starting on September 1.

As a result, and with China on Monday letting the yuan tumble beyond the 7-per-dollar level for the first time in over a decade (which raises the cost of dollar-denominated oil imports in China), global crude benchmark Brent futures fell more than 3 percent, by $2.08 to settle at $59.81 per barrel.

West Texas Intermediate also dropped, by 97 cents to $54.69 per barrel.

Jim Ritterbusch, president of Ritterbusch and Associates, said in a note: "While latest trade headlines will be forcing downward adjustment in global oil demand expectations for this year and possibly next, it is looking quite likely that Asia will bear the brunt of the expected slowing in oil demand growth."

John Kemp, commodities analyst for Reuters, portrayed hedge fund managers as being "deeply divided over the future direction for oil prices" until the announcement of fresh tariffs, with portfolio managers bullish about oil because of supply disruptions and Organization of the Petroleum Exporting Countries cuts on one hand, and those bearish because of the economy on the other.

Kemp wrote, "From a positioning perspective, the oil market still looks close to balance, with a roughly equal chance of short covering or long liquidation moving prices higher or lower.

"From a fundamental perspective, however, the economic outlook has clearly deteriorated, with U.S. interest rate traders marking up the probability of recession sharply."

Another concern about China was voiced on Monday: a Bank of America Merrill Lynch report warned that "While we retain our $60 a barrel Brent forecast for next year, we admit that a Chinese decision to re-initiate Iran crude purchases could send oil prices into a tailspin," and it added that prices could sink by as much as $20-30 per barrel in that scenario.

The question is, will Trump's most recent tariff hike - one that is intended to force China to come to a trade agreement quickly - have the negative effect of an increase in hostility between the two countries?

As far as Wall Street analysts are concerned, the answer is yes: a Morgan Stanley team of analysts  said, "investors should behave as if further escalation will happen in 2019", and that if it does, a global economic recession will come in the next nine months.