Oil prices rose on Friday after the U.S. and China seemed to hammer out a trade deal that postponed tariffs. But after studying the details – or lack thereof – investors lost much of their enthusiasm.
Crude prices were down at the start of trading on Monday, a reflection of disappointment following last week’s trade announcement. President Trump did his best to sell the deal, arguing that it was the first of a phased approach that would eventually amount to a broad and comprehensive trade agreement. He also encouraged American farmers to buy more tractors because of the massive volumes of corn and soybeans that China would be buying.
Global markets did receive a jolt on Friday, pushed higher on news that the U.S.’ scheduled tariffs on $250 billion worth of Chinese goods would not increase from 25 to 30 percent, as had been scheduled.
However, the main justification of the trade war to begin with – deep disagreements over China’s industrial policy, intellectual property theft, forced technology transfer, and other structural issues – remain untouched, which raises questions about how the two sides are going to agree to something comprehensive. The partial trade agreement largely consists of China promising to buy U.S. agricultural goods in exchange for a suspension of tariffs. It leaves existing tariffs in place.
“Past experience is that U.S.–China trade agreements aren’t worth the paper they are written on, and this one hasn’t even been written down,” Tom Orlik and Yelena Shulyatyeva of Bloomberg Economics said in a statement. “For now, though, indications on trade are a little more positive. If that persists, it could help put a floor under sliding global growth.”
Cracks formed quickly after the hype on Friday. For one thing, there isn’t even text yet. Trump said that the deal would be written and agreed to by next month, but China apparently wants to hold more talks in October before they sign on to anything. In fact, Chinese media didn’t even refer to last week’s announcement as a “deal.” Moreover, Beijing wants the planned tariff hike in December to be scrapped.
It’s not clear what all of this means, but the upshot is that the U.S. and China are spinning last week’s talks in different ways, and may not be on the same page in regards to what exactly was agreed to in the negotiations.
Ultimately, this deflated much of the optimism that emerged immediately after last week’s talks. “It appears that the results of Friday’s trade talks are not seen as going far enough. What is more, the US and China are still far from reaching a comprehensive agreement,” Commerzbank said in a note on Monday.
A more optimistic take on the partial trade deal is that it not only suspends tariffs, but creates some goodwill and momentum that could provide a foundation for a more meaningful breakthrough in the future. There are incentives for both sides to call off the trade war, if they can find a face-saving way to sell an agreement in both capitals.
But the broader point is that it may not be enough to stave off an economic recession. The head of the IMF said that there is a “serious risk” that global economic deceleration will spread. Analysts expect the Fund to cut global growth once again in its upcoming report.
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The slowdown is already evident. Last week, the IEA cut its forecast for oil demand growth to just 1 million barrels per day (mb/d) in 2019, down from 1.1 mb/d previously. It was the latest in a series of downward revisions by the agency this year.
Hedge funds and other money managers continued to sell oil futures, and last week they staked out the most bearish position regarding oil since the start of the year.
“At the Oil and Money conference last week there seemed to be an almost unanimous verdict that the risk to the oil price was to the downside amid plentiful supply growth in combination with a cooling global economy,” Bjarne Schieldrop, chief commodities analyst at SEB, said in a statement.
The “continued inability of geopolitics to sustain price gains is a testament to the state of concerns over demand,” JBC Energy wrote in a note.
By Nick Cunningham of Oilprice.com
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