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Trade Wars And OPEC Meeting To Make For A Volatile Week For Oil

Article By: ,  Senior Market Analyst
June 18, 2018 12:27 PM

The escalating US – Sino trade war, which will see China apply tariffs to US oil imports as a retaliation measure for the US $50 billion worth of tariffs on Chinese imports, has come at a crucial time for the oil markets; just days before OPEC and non-OPEC members meet to discuss the potential easing of voluntary supply cuts.

With China moving away from buying up oil from the US it will most likely look to purchase from other OPEC members, possibly even sanction hit Iran, increasing demand pressure on OPEC oil therefore pushing up prices. 

OPEC will be the standout winner of the trade spat between China and the US with oil prices expected to be supported by higher Chinese demand, making this a good time for OPEC & non-OPEC members to start removing the supply cuts. 

However, there is of course a large element of uncertainty here, which we expect OPEC to recognise when they meet at the end of the week. Just a few weeks ago China was going to start importing more US oil to reduce the US deficit and now it will reduce the amount of oil as the tit for tat trade levies start rolling. 

There is a good chance that OPEC will want to see how this trade war spat plays out before they start taking decisions on easing the supply cuts by any large amounts. Rumours circulating are suggesting that the increase in production will be minimal, which saw oil bounce back up off session lows and trade higher on the day.

Oil majors rebound

The sharp turnaround in the price of oil saw oil majors on the FTSE such as BP& Shell reverse from the biggest drag on the index to the biggest winners. 

The strong oil sector, in addition to the weaker pound meant the FTSE was faring better than its European peers as trade war fears weighed on sentiment. The Dax was a standout loser down over 1.6% as the reality of trade war and the impact on German industry started to hit home. 

Up until now markets have appeared sanguine regarding Trump’s protectionist policies assuming they were part of a broader negotiating stance.

Elsewhere on the FTSE miners were also dominating the lower reaches of the index as copper prices dipped to a two week low pressurise by the stronger dollar.

GBP/USD under pressure

As concerns of escalating tit for tat trade levy measures persist the dollar is benefitting from the risk off climate climbing back to 94.80 versus a basket of currencies. 

Meanwhile the pound was out of favour as pressure mounts on Theresa May, as the Brexit Bill looks to be defeated in the House of Lords with fresh demands for a meaningful vote.

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