Oil dragged into U.S.-China trade war, prices slump

NEW YORK (Reuters) – China on Friday threatened to impose tariffs on U.S. crude oil imports for the first time, sending prices down nearly 4% to two-week lows as the escalating bilateral trade war fed worries over a slowdown in global oil demand.

China said crude would be among the U.S. products hit by tariffs of 5% as of Sept. 1. U.S. President Donald Trump responded with a series of tweets ordering U.S. companies to look at ways to close their operations in China.

The trade war between the world’s two largest economies has dragged on for over a year and roiled financial markets. Though Chinese and U.S. trade negotiators held discussions as recently as this week, neither side appears ready to make a significant compromise and there have been no signs of a near-term truce.

China, one of the world’s biggest crude importers, has sharply lowered U.S. shipments from a record high hit last year. With the latest tariffs, purchases are likely to grind to a halt, traders and analysts said.

A shale boom has helped the United States become the world’s largest oil producer, ahead of Saudi Arabia and Russia, and exports have surged to a record above 3 million barrels per day (bpd) after a ban was lifted in late 2015.

“The tit for tat trade war now has the oil market officially caught in the crossfire, this time with China striking the heart of Trump’s traditional base of support of U.S. oil producers,” said Michael Tran, director of energy strategy at RBC Capital Markets in New York.

“With China being the world’s foremost crude import growth region, U.S. producers need China, not the other way around,” he said. “The U.S. will have to find alternative buyers for their crude, which will be a challenge given the weakening global demand backdrop.”

U.S. shipments to China have made up about 6% of total U.S. crude exports on average so far this year, according to data from the Department of Energy and the Census Bureau.

U.S. West Texas Intermediate (WTI) crude futures CLc1 slumped as much as 3.7% to $53.32 a barrel on Friday, the lowest since Aug. 9. The rising trade war is likely to weigh on U.S. crude more than international benchmark Brent, market sources said.

“Chinese buyers will (now) be looking to purchase Brent and Dubai-based crude oil and I would expect that to result in a widening of the Brent to WTI spread,” Andy Lipow, president of Lipow Oil Associates in Houston.

“In essence what you’ve done is created new demand for Brent-based crude oil at the expense of U.S.-origin crude.”

U.S. crude exports to Asia so far in August indicate weaker flows around 892,000 bpd, down by 360,000 bpd from last month, according to market intelligence firm Kpler. The drop was driven by a decrease in shipments to South Korea and China, down by 114,000 bpd and 52,000 bpd respectively month-over-month in August, the firm’s vessel-tracking data showed.  

“Further disruption is likely even if the tariff is only 5%,” said Reid I’Anson, an energy economist at Kpler.