The ongoing trade war between the two superpowers, USA and China, occurred at a tough time for both the economies. While the start of the trade war is ambiguous, market analysts have zeroed the date to May 2018. The retaliatory policies of both nations hit the US soybean prices hard at the end of May commencing the trade war. Some statistics prove that both countries have witnessed the ripple effects of the trade war. The stock index benchmark for USA i.e. S&P 500 index, has remained flat with sporadic elements of ups and downs. The Chinese index, the Shanghai Composite ndex, is down 16% since the start of the tussle with the exports slowing down.
The monthly report on trade data of China reflected another reminder of the serious impact that the US-China trade dispute has had on exports of US crude oil. In December, China did not import a single barrel of US crude oil. China, the world’s second-largest consumer, has barely imported significant barrels of US crude since July 2018. Before the disputes emerged, China accounted for around 20% of all US exports on an average with an equivalent data of over 11 million barrels per month. China imported a record 10.4 mbpd in November and commenced the year on a strong stance. China will be a key import market for US crude oil although doubts have emerged about the pace of Chinese economic growth in 2019.
The absence of China has not dented the demand for US crude oil. In late 2018, exports have continued to rise with October setting a new record as 72 million barrels were shipped globally. South Korea filled much of the gap left by the absence of Chinese demand radically stepping up its imports of US crude oil. With the growing demand of the commodity, crude oil will always find a potential buyer, hence, the growth in US exports will unlikely derail the temporary unavailability of demand from China.
In a longer perspective, the absence of US oil from China will inevitably weaken both sides. For US exporters, the Asian markets represent the largest opportunity. Since the last few years, the economic growth in Asia has seen a robust development than the other potential markets of Europe, Canada or South America. Asian markets have accounted for around half of all US exports in November even without the presence of China.
China has had to scramble to replace US exports raising unwarranted consequences for buyers from China. The trade war has occurred at a time when OPEC nations and their close ally Russia are reducing the output to spur prices along with supplies from Venezuela looking increasingly unreliable given the political turmoil enveloping the nation. With tighter supply in place, China should be tapping into the significant growth in the US output to diversify its suppliers and to help bridge the growing energy gap.
The energy markets are keeping a close eye on the developments of trade negotiations between the two sides and any indications are immediately affecting oil prices. When resolutions are attained between the two nations, longer-term prospects are seemingly looking advantageous. In hindsight, China requires more energy imports to fulfil its development requisites. On the other hand, the US is setting new records for exports on a monthly basis.
The growth in the US supplies of energy to China would be the likely route to help lower the giant deficit between the two countries, defusing some of the current diplomatic tensions between the two giants. With one eye on the trade war, it is hard to imagine that there will not be a resumption of normal trading patterns in the near short to medium term given that one of the world’s major producers of oil needs one of the world’s leading consumers and vice versa. Which way will the sail tilt? It’s anyone’s guess at the moment!
Vivek Risal is associated with Mercantile Exchange Nepal Limited in the capacity of Manager in Research and Development Department. He can be contacted at firstname.lastname@example.org