Oil Slumps Despite OPEC-Plus Production Cuts as Trump Tariffs Batter China

The US flag flies over Chinese shipping containers that were unloaded at the Port of Long Beach, in Los Angeles County, on Sept. 29, 2018. Mark Ralston/AFP/Getty Images

After a two-week rally, oil prices fell more than 2 percent Jan. 14 as gloomy trade data from China deflated investor expectations for future demand.

Brent Crude, the world’s leading oil price benchmark, dropped from $60.5 a barrel to just over $59 per unit on Jan. 14, after China’s regime reported the worst export and import declines in two years in December. Exports fell 4.4 percent compared to last year, while imports plunged by 7.6 percent.

“Oil prices are getting weighted down by the prospects of weaker economic growth in China,” Stephen Innes of futures brokerage Oanda said in a report. “This data drives home just how negative of an impact trade war is having on the Chinese and perhaps global economy.”

Paradoxically, there is little sign on the ground that Chinese oil demand has weakened. China’s crude imports in December surged nearly 30 percent compared to a year earlier, Reuters calculations of customs data showed.

Trade War

President Donald Trump has imposed a 25 percent tariff on $50 billion worth of Chinese imports and 10 percent tariff on a further $200 billion of imports in 2018. All tariffs are set to jump by 25 percent on March 1, unless the two countries reach a trade agreement, in which Trump demands stronger Chinese protections for U.S. intellectual property, an end to forced technology transfers, and greater market access to China for U.S. companies.

China responded with tariffs on $110 billion of U.S. imports but could not broaden the tariff base much further, since it is importing less than $130 billion worth of U.S. goods a year.

Trump’s tariffs have hit the Chinese companies much harder than U.S. consumers, since the administration strategically targeted products that place greater pressure on the seller to absorb tariff costs, a November research paper found.

“Bottom line [is] China needs a deal, if they are interested in stopping the free fall in their economy,” PRICE Futures Group senior analyst Phil Flynn said in his Jan. 14 report. “While some argue they are playing the long game when it comes to this trade war, they really are going to have a hard time recovering if they let this linger much longer.”

Both Trump and Chinese officials have been sending positive signals about trade talks but investors seem to be playing it safe on oil, also counting in a drop in output from Europe, where November industrial output numbers fell the most in nearly three years.

OPEC+ Cuts

Oil prices dwindled by about 35 percent over the last three months of 2018 due to the trade war, rising U.S. production, and Trump waiving sanctions on major importers of Iranian oil.

Trump appeared reluctant to hand out waivers before sanctions on Iranian energy, banking, and other sectors kicked in Nov. 5. Trump convinced Saudi Arabia, Iran’s rival, to boost production ahead of the sanctions but then issued the waivers to eight importers, sending oil prices tumbling.

Saudis, a leading player in the Organization of the Petroleum Exporting Countries (OPEC), responded by cutting production by 420,000 barrels a day in December. At a meeting that month, OPEC and allied oil producers (OPEC+), which includes Russia, agreed to cut production by another 1.2 million barrels a day—despite Trump’s objection.

By Dec. 24, Brent Crude had dropped below $50.5 per barrel, close to the $50 threshold below which the oil industry starts to lose money, according to Flynn.

The market rallied and Brent soared above $61 on Jan. 9, only to be undercut by weak economic data again.

Saudi Energy Minister Khalid al-Falih said on Monday he is not worried about a global slowdown hurting oil demand as of yet.

“The global economy is strong enough, I’m not too concerned,” he told reporters in Abu Dhabi. “If a slowdown happens it will be mild, shallow, and short.”

Reuters contributed to this report.