Trade tension intensifies; crude oil to fluctuate

The U.S. and China are at it again. Last week President Donald Trump said he was going to impose new tariffs on $50 billion of Chinese imports, effective July 6. China is not one to take this lying down and Beijing has decided to strike back with their own duties on American products, which include oil.

This move is expected to affect U.S. energy companies as well as oil prices in general. If China decides to reduce its purchase of oil from the U.S., the beneficiaries of that move would be Russia and the OPEC, who had reduced their supplies over the past 18 months, leading to high crude oil prices. Russia and Saudi Arabia have already announced intentions to increase exports.

The situation has been further complicated by the Iran sanctions and the U.S. Federal Reserve policy. China has been making significant oil purchases from both the U.S. as well as the Middle East. In the current situation, China is not likely to toe the line with the U.S. but could very well be expected to reduce its oil imports from the U.S. and substitute them with oil imports from Iran.

China can be expected to substitute U.S. oil imports with oil imports from Iran

Over the past three years, the U.S. had been witnessing a considerable increase in oil production and China was a large consumer of this production. The increase in U.S. production had compensated for the reduction in supply from Russia and the OPEC. According to data from Reuters, the value of oil exports to China from the U.S. has surged over the past one year and stands at around $1 billion per month at present.

The new tariffs would push up U.S. oil prices higher than other regions and upset this business which is doing well right now. The interest rate hikes by the Fed has also affected the oil industry. The prices for crude oil are likely to see heavy fluctuations after the OPEC’s June 22 meeting and over the coming months. Some investors have reduced their holdings in energy companies in light of the current situation.

Hit by the U.S. and China trade war turmoil, Dow opened in red and continued its triple-digit downward movement during today’s morning session.