Trade war could push oil prices even lower

CALGARY Collateral damage from the escalating trade war between China and the U.S. has hit oil demand hard and could push prices lower if trade tensions continue to escalate.

“It’s bearish. It’s been bearish all along,” said Edward Morse, global head of commodities research at New York-based Citigroup, of the yearlong and increasingly tense trade fight between the world’s two largest economies.

On Tuesday, Brent oil slid into bear-market territory, ending the day down 1.5 per cent, as the market continued to digest U.S. President Donald Trump’s decisions to label China a currency manipulator and threaten Beijing with a 10 per cent tariff on another US$300 billion of Chinese goods.

The global benchmark has now fallen more than 20 per cent since a late-April peak, meeting the common definition of bear market. West Texas Intermediate for September delivery lost US$1.06, or 1.9 per cent, to US$53.63 a barrel on the New York Mercantile Exchange.

Oil producing countries such as Canada will continue to see their main export caught in the crossfire as most analysts expect the trade war between the two countries will drag on. Morse said the trade war has caused Chinese economic growth to slow, with every one per cent drop in Chinese GDP growth translating to a 250,000-barrelsper-day decline in oil demand.

In addition, he said the trade war has had a larger impact on oil demand by slowing global trade growth from seven per cent before the tariff-brinksmanship of the U.S. and China to just 2.5 per cent after. As a result, global oil demand has declined by half a million barrels per day. Morse said he expects Brent prices to decline to the low US$50-per-barrel range by the middle of 2020.

By contrast, the U.S. Energy Information Administration published Tuesday its own short-term energy outlook, forecasting Brent crude oil prices would average US$65 per barrel next year.

Francisco Blanch at Bank of America Merrill Lynch wrote in a research note this week that oil is “at the edge of a cliff.” He said growth in global oil consumption has slowed to about 600,000 bpd in the past six months compared with an average of 1.5 million bpd over the past four years. “In our view, global oil demand has been trapped for some time between the negative effects of protectionism on industry and the mildly positive effects of populism on consumer sentiment,” Blanch wrote.