Crude Mixed as Asian Refiners React to Impending Trade War

The minority analytical view sees plenty of opportunity in the current turmoil. File Image / Pixabay

Conflicting opinions over what will happen to crude supplies in the near future, coupled with concern over the escalating trade war between the U.S. and China, was appropriately matched by mixed market performance for crude on Friday, with the U.S. benchmark achieving modest price gains and the international benchmark slipping slightly.

West Texas Intermediate rose 61 cents to settle at $73.55, while Brent declined by 39 cents to $77 per barrel.

So far, WTI's relative resiliency is not something that would please U.S. president Donald Trump, who in tearing up the nuclear deal with Iran and reimposing sanctions against the Islamic republic, is betting that Saudi Arabia and other countries will not only make up for the shortfall in Iranian crude exports but also flood the market with enough product to reduce gas prices at the American pump.

While the general consensus among analysts is that Trump's gamble won't pay off and global supplies will tighten, there is ample evidence to argue that a combined effort by the Saudis along with Russia and U.S. will be more than enough to offset losses.

It should also be noted that for the week, WTI was on track for a loss of about 0.4 percent while Brent was down about 3 percent.

Trump's trade war with China - which like the Iran conflict was predicated on the not entirely inaccurate argument that the U.S. was getting the short end of the stick with regards to business relations - is another example in which pundits are predicting rough road ahead, despite compelling arguments from minority voices that the dispute will eventually resolve in the Americans' favour.

Reuters on Friday reported that Asian oil refiners are racing to secure crude supplies in anticipation of tensions with China (which has has threatened a 25 percent duty on imports of U.S. crude) and the sanctions against Iran aimed at shutting the country out of oil market.

An executive from China's Dongming Petrochemical Group told Reuters his refinery had already cancelled U.S. crude orders: "We will switch to either Middle East or West African supplies."

John Driscoll, director of consultancy JTD Energy, suggested that China may even replace American oil with crude from Iran: "They [Chinese importers] are not going to be intimidated or swayed by U.S. sanctions."

But as is the case with any geopolitical conflict, the smart money always identifies opportunities, and Lee Dal-seok, senior researcher at the Korea Energy Economic Institute pointed out that "If China retaliates with tariffs on U.S. crude, that could improve South Korea's terms of buying U.S. crude...because the U.S. would need a market to sell to."

More importantly, some respected observers refuse to join the popular chorus of Trump bashing and suggest the brash billionaire may be picking a fight with China at just the right time: Stephen Guilfoyle, a Wall Street trader and president of Sarge986, said the president's trade policies have China "by the short hairs."

After noting that China holds about $118 trillion in U.S. debt, Guilfoyle pointed out that "we've got a pretty hot economy" and that China is struggling in comparison: "They have retail sales in the hole... they've got industrial production in the hole, the Shanghai Composite [stock index] is down 17 percent year-to-date.

"We've got these guys where we want them."

But for a crude market focused mainly on short-term impacts, analysts see nothing but gloom around the corner: in discussing the possibility of China placing a tariff on U.S. oil, Commerzbank said in a note that "Chinese demand would then shift to other suppliers, [and] because the oil market is already in tight supply due to the numerous outages, this would drive international prices (Brent) further up."

As for the Saudis upping their output, Bob Yawger, director of energy futures at Mizuho, said, "The more that Saudi Arabia adds to the market, the less of a supply cushion we have - that's a bullish twist to a bearish development."

Another minority voice that thinks current market events are pointing to success rather than failure is NAB, which earlier this week said its oil price forecasts "point to Brent spending the next few months largely in the mid-to-high $70s range, although meaningful OPEC-Russia output increases could push prices lower later in the year and higher U.S. shale production should impose an upside limit on West Texas Intermediate."