Oil Falls as US-China Dispute Threatens Trade Link to article : https://www.wsj.

Question

Oil Falls as US-China Dispute Threatens Trade

Link to article : https://www.wsj.com/articles/oil-drops-in-choppy-trade-ahead-of-opec-meeting-1529404877

Brent Crude and West Texas Intermediate futures both fell on Tuesday, with WTI futures falling 1.9% to $64.62 a barrel and Brent Crude falling 0.9% to $74.70 a barrel. As Trump said he was looking to extend duties on Chinese imports, China said it planned duties against U.S. crude oil among other imports as a response to the U.S. tariffs. The main issue for the U.S. here is that the trade war and tensions could threaten growth, oil demand, and an important market for American oil. It is also important to consider the impact of OPEC and the possibility of a global supply increase from them as Saudi Arabia, Russia, the U.A.E, and Kuwait could increase production, sending prices even lower. The recent drop in oil could also be seen in refined products such as diesel and gasoline as well. It will be very interesting to see how trade tensions and an upcoming OPEC meeting further affect global oil prices.

Questions:

1. How else do you think the ongoing trade dispute will affect global commodity pricing? For example, what other commodities do you see being affected the most?

2. Without the Chinese demand for U.S. oil, if you were a manager of a U.S. based oil company, what would you do in order to keep shareholders happy?

Explanation / Answer

1) Due to trade war I see prices of commodity collapsing. China is the largest commodity consumer in the world. Some other commodities that might be affected besides crude are coal. One of Trump’s election agenda was to revive the coal industry and China was one of the markets that were being targeted by the Coal miners. With increased tariffs due to trade war coal miners would take a hit. Similarly prices of natural gas is also expected to fall. China is the 3rd largest buyer of US Lng. This is one truly big missed opportunity. China is focusing on a cleaner environment and hence its demand for Lng is supposed to soar in the next few year, and there is supposed to be a demand surplus.

2) In order to keep the shareholders happy I would return some money to the shareholders through dividend or stock buyback.

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