The U.S.-China Trade War Needs to Stop If Oil Prices Are to Rise

Oil prices rose significantly in the early part of the year as oil producers came together to cut down the excess supply prevailing in the market. But things have taken a turn for the worse as oil prices have started crashing since the end of April.

This is due to oversupply conditions developing despite the efforts of major oil producers such as OPEC to curtail production and reduce inventories, and oil price sentiment has been hit hard by weak demand conditions that are prevailing as a result of the U.S-China trade war.

How is This Trade Stand-off Affecting Oil Prices

Economic growth is the key to oil consumption in any economy. In China, economic growth has slowed down and the country’s trade war with the U.S. isn’t helping it either. According to a report:

Data from China showed that factory output slowed to its weakest pace on record last month, adding to pressure on the country to unleash further fiscal and monetary stimulus as the trade war with the US remained unresolved.

Economic conditions in China have reduced the country’s need for oil. Chinese oil imports slumped 8% last month after hitting record levels in April. Moreover, Chinese buyers have been scaling back their purchases of U.S. crude oil. As reported by the CNBC:

Beijing has declined to slap an import tax on U.S. crude in retaliation against the Trump administration’s tariffs on Chinese goods. But Chinese buyers nevertheless stopped purchasing American supplies last year as the trade dispute with Washington escalated.

Not surprisingly, inventories of crude oil in the U.S. have been building up once again as the country seems to have been shut out from a lucrative oil market, though there has been some reprieve on this front of late.

However, an end to the U.S.-China trade war will be essential to reduce the volatility in oil prices.

Other Favourable Factors for Oil

If one looks beyond the U.S.-China trade stand-off, there’s a lot to like about the other developments taking place in the oil industry from a pricing point of view. For instance, the U.S. is considering imposing more sanctions on Iran, and that could further reduce the amount of oil that comes into the market and keep inventories under check. CNN reports:

We have additional avenues of sanctions pressure to impose. We have got additional sanctions for sure,” a senior administration official told a small group of reporters Friday. “I would not say that the President is thinking about military options. The primary thing we’re thinking about is additional sanctions.

On the other hand, OPEC continues to adhere strictly to its oil production cut promise. As such, don’t be surprised to see oil rallying once again in the coming months, but for that to happen, the U.S.-China trade stand-off will have to come to an end as it can become the primary catalyst for the next rally.

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Harsh Singh Chauhan
Harsh Singh Chauhan has a wealth of experience evaluating publicly-traded companies across several verticals, including technology, oil and gas, retail, and consumer goods. His financial writing has been published across platforms such as The Motley Fool, TheStreet, and Seeking Alpha. Harsh's philosophy is to find great businesses for the long run based on company fundamentals and industry prospects. Address: 682 Indian Road, Toronto, Ontario, M6P 2C9. Phone: 416-721-8257.
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