Oil markets appear to be full of uncertainty, awaiting the outcome of the OPEC+ meeting for more direction. But some clues about the trajectory of oil prices in 2019 may come a few days earlier in Buenos Aires.
The G20 summit in Argentina is underway, where the heads of state from around the world are meeting face to face. Buenos Aires is hosting the three most important figures in the oil market – Saudi crown prince Mohammed bin Salman, Russian President Vladimir Putin and U.S. President Donald Trump.
Ahead of the meeting, the supply surplus has ballooned. “A significant production cut on the part of OPEC and its allied non-OPEC producers at their meeting next week in Vienna will thus be needed to rebalance the oil market next year and ensure that stocks do not rise any further,” Commerzbank said in a note. “Preparatory talks are already likely to be held on the fringes of the weekend’s G20 summit in Buenos Aires.”
However, if there are talks in Buenos Aires, it is unlikely that the details will be made public. Instead, the biggest news to come out of the G20 summit will be emanating from the meeting between Trump and his Chinese counterpart.
The U.S.-China trade war has steadily escalated over the course of 2018, and the dispute is now at a critical crossroads. Trump’s mercurial personality means that the conflict will likely either be resolved after a single meeting with Xi Jingping, or the trade war will explode into a more serious conflict.
In an interview with the Wall Street Journal, Trump said that it was “highly unlikely” that he would delay the scheduled increase in tariffs. The 10 percent tariff that he put on $200 billion of Chinese imports is set to jump to 25 percent at the start of 2019. Related: The Oil Powerhouses Replacing OPEC
Trump also said that if the upcoming meeting with Xi – scheduled for Saturday – does not go well, he wouldn’t hesitate to move forward with his previously threat to slap tariffs on an additional $267 billion of imports from China. That would essentially put tariffs on just about every good that flows from China to the United States. “If we don’t make a deal, then I’m going to put the $267 billion additional on” at a tariff rate of either 10 or 25 percent, Trump told the Wall Street Journal.
“This is an opportunity, with the two presidents, to break through what have been disappointing discussions,” Larry Kudlow, Trump’s top economic adviser, told reporters at a meeting at the White House. “This is a big deal, this meeting. And the stakes are very high.”
However, the tough talk belies a bit of panic from the White House. The trade war is already starting to take a toll on the U.S. economy. American farmers have been hit hard by retaliatory tariffs from China, which have tanked prices for corn and soybeans. More recently, the stock market has seen a spike in volatility, and all of the gains U.S. stocks have seen in 2018 have been wiped out in the last few weeks.
Perhaps more painful was the recent announcement from General Motors that the company was closing down five factories and laying off 14,000 people. A few of those plants were in states – Michigan and Ohio – that Trump won in the 2016 presidential election, which makes the announcement a political threat to some degree. Automakers warned that steel and aluminum tariffs would cost the industry. Ford said a few months ago that the tariffs would cost it $1 billion, and GM said in June that tariffs would force job cuts. Related: The Biggest Losers Of The Current Oil Price Slump
The GM closures likely has the White House rattled, and perhaps makes Trump more eager for a thaw in the trade war than at any other point to date. China has also been hit hard by the trade war, but Xi is not accountable to an electorate and can likely weather the storm with more ease than Trump. It is unclear how this will end up. Xi has been keener not to escalate the trade war, which could make him amenable to a deal. The flip side is that if he senses desperation from Washington, he could dig in and take a tougher line.
The bottom line is that the trade war could go one of two ways after this weekend. The ramifications for the oil market are profound. Most economists are already predicting a global economic slowdown in 2019. Any escalation of the trade war will cause more headaches, potentially forcing more downward revisions in oil demand, and thus, drag down crude prices.
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On the other hand, Trump may give in to Xi and call off the trade war, just as he did with North Korea and the nuclear program last year. Declare victory and go home. That would remove one of the major headwinds from the oil market heading into 2019. And this will all occur before the OPEC+ meeting next week.
By Nick Cunningham of Oilprice.com
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President Trump did not really anticipate China’s response when he imposed tariffs on its exports to the United States. He thought that China will bend the knee to him. This not only didn’t happen but China retaliated blow by blow to his imposition of tariffs. Moreover, it stopped completely buying US crude oil and curtailed very significantly purchases of US LNG.
It is now dawning on President Trump that he can’t win a trade war with China. Moreover, he is very ill-advised to threaten China with more tariffs on the remaining $267 bn of its exports to the US on the eve of his meeting with his Chinese counterpart.
Were China to be prevented from exporting $800 bn worth of Chinese goods to the American market, it could easily sell them somewhere else since its economy is much bigger and more integrated with the global trade system than the United States’.
The United States will pay a very heavy price in trying to replace the Chinese exports with more expensive imports from other countries. This will add more costs to American consumers, exacerbate US budget deficit and inflation and add 2.35% to America’s $21 trillion outstanding debts. In other words, the US will be the loser in a continuation of a trade war with China.
Despite President Trump’s tough talk, his position vis-à-vis China has been weakened in recent time. The trade war is already starting to take a toll on the US economy. American farmers have been hit hard by retaliatory tariffs from China, which have tanked prices for corn and soybeans. More recently, the stock market has seen a spike in volatility, and all of the gains US stocks have seen in 2018 have been wiped out in the last few weeks. Perhaps more painful was the recent announcement from General Motors that the company was closing down five factories and laying off 14,000 people. Automakers warned that steel and aluminium tariffs would cost the industry billions of dollars.
That is why I believe that President Trump may be more inclined to reach a breakthrough with the Chinese President ending the trade war. Still, in typical Trump’s pattern, he will declare victory exactly as he did with North Korea. Still, the global economy will give a huge sigh of relief.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London