Why oil could help resolve the US-China trade stand-off

If US president Donald Trump wants the lower oil prices he has consistently demanded, then escalating a trade war with China is one unconventional method of meeting that short-term goal.

Crude prices tumbled on Monday alongside stock markets, after Mr Trump’s threat to raise tariffs on $200bn of Chinese goods. Brent crude briefly dipped back below $70 a barrel, taking the international benchmark well below the level it traded two weeks ago when the Trump administration announced it was removing all sanction waivers for Iran’s customers.

The decline comes despite bullish traders consistently pointing to the build-up of geopolitical threats in the market, from Iran to Venezuela, which have tightened supplies compared with earlier this year.

These threats appeared to increase over the weekend, with John Bolton, US national security adviser, saying a US aircraft carrier was heading to the Middle East to send a “clear and unmistakable message” to Iran.

But for most oil traders, the threat of an escalating trade war with China is a more immediate risk.

China overtook the US as the world’s largest crude importer earlier this decade, and the two countries account for almost a third of world oil consumption. So the duo plays an outsized role in the oil market, before even starting to account for the spillover effects that a damaging trade war would have on the wider global economy.

Oil, therefore, may not lie at the heart of the dispute, but crude traders cannot easily ignore it, regardless of the threats to supplies elsewhere. But while the risk to the oil market is real, focusing solely on prices may underplay the role that energy could ultimately have in resolving the stand-off.

The US is the fastest-growing source of global energy supplies due to the shale revolution. China, meanwhile, accounts for the fastest-growing portion of global oil consumption, while its demand for seaborne cargoes of liquefied natural gas is also soaring.

So while the dispute around tariffs goes far beyond trade balances, energy is one area where the two countries have a mutual interest in finding common ground.

China has notably slashed its imports of US energy supplies as the trade war has intensified, from more than 430,000 barrels a day of crude in March 2018 to less than 100,000 b/d in March of this year.

Few products have the power to influence the US trade deficit with China quite like oil, with a single supertanker carrying approximately $140m worth of cargo.

Just getting crude oil exports back to where they were a little over a year ago would reinstate approximately $12bn in annual trade, with additional LNG supplies likely to take that figure far higher.

In the short term the US has calculated that it can trust in the flexibility of its oil industry to find overseas markets for its fast-rising exports. But to cut out China entirely would deprive it in the long run of a natural market for its growing shale bounty.