The U.S. and China appear to be making progress on trade talks ahead of the G20 assembly, but should they fail, the fallout for the oil market could be significant.
If the U.S. and China cannot come to a settlement and the trade fight escalates, oil prices may plunge to $30 per barrel, based on Bank of America Merrill Lynch.
That’s because the Trump administration has threatened to impose tariffs on $300 billion value of Chinese imports, which might cover just about every Chinese good coming into the nation. The economic ache on the global economy can be substantial, but the impact can be particularly damaging on China. In response, Beijing would possibly feel compelled to let the yuan weaken to prevent a collapse of exports.
That, in turn, would severely cut down on oil demand. Since crude is priced in dollars, a weaker yuan would make oil vastly more expensive in China.
However, an extension of the cuts is just the bare minimum needed to keep prices from falling. With the reductions already primarily baked into oil worth assumptions, there may be seemingly little upside available to rates from an extension. Moreover, even as OPEC+ restrains output, they’ve significantly built back a measure of spare capacity. OPEC now has about 3.2 million barrels per day (mb/d) held in spare capacity, according to the International Energy Company. “That is welcome news for consumers and the wider health of the
at present vulnerable global economy, as it will limit significant upward pressure on oil prices,” the IEA wrote in its June Oil Market Report.