Saturday, September 14,
2019 /07:30AM / By Oilprice.com / Header Image
Credit: asia.nikkei.com
Chinese-US trade figures in August came
in well below expectations illustrating the negative impact of the ongoing
trade war. Chinese exports to the US in August were down 16%, while imports
from the US dropped by 22%. Overall, Chinese exports fell 1% year on year, the
biggest drop since June, when they slumped 1.3%.
However, Beijing and Washington have
agreed to restart trade negotiations in early October with officials already
attempting to lay the groundwork.
The problem is we have been here before
only to see the talks break down and the US escalate the war with new tariffs,
against which China then retaliates. New talks are positive, but only if they
produce a positive result.
Another problem is that time has taken
its toll.
Already back in June, the World Bank
revised down its forecast for global GDP growth to 2.6%, creeping back up to a
still meager 2.7% in 2020 and 2.8% in 2021. In early September, BP chief
financial officer Brian Gilvary forecast that global oil demand would rise by
less than 1 million b/d this year as consumption slows.
In its latest Short-Term Energy
Outlook, the US Energy Information Administration has also cut back its
forecast for growth in global liquids consumption this year from 1.0 million
b/d to 0.89 million b/d. Growth in 2020 is forecast at 1.4 million b/d. This
has to be set against growth in non-OPEC supply of 2.18 million b/d in 2019 and
2.21 million b/d in 2020.
Weak demand undermines OPEC's
production cuts and accentuates the impact of the expected increase in non-OPEC
production this year and next. OPEC is in effect swimming against the tide.
It has also now seen two consecutive
monthly rises in its own production. Secondary source estimates showed an
overall rise of 50,000-80,000 b/d in OPEC output in August, with Iraq again
failing to comply with the organisation's agreed quotas.
Even if optimism surrounding the
renewal of trade talks grows, it is increasingly likely that further
supply-side restraint or unanticipated disruptions will be needed to keep the
oil market steady.
False optimism?
The main reason to hope for an end to
the trade war is that both the Chinese and US economies are suffering, but by
how much?
US non-farm payrolls rose by 130,000 in
August, below expectations and accompanied by downward revisions to previous
months' data as well as being boosted by federal recruitment for the 2020
census, but the US economy is still creating jobs. The unemployment rate at
3.7% is holding steady at a very low level and the employment-population ratio
is at a ten-year high of 60.9%.
Even so, the forward looking indicators
for the US are deteriorating - the World Bank's forecast sees US GDP rising by
2.5% this year, but then slowing to 1.7% in 2020. US business confidence turned
negative in April, suggesting that investment levels will not be sufficient to
keep non-farm pay rolls on an upward trajectory.
Already suffering in the opinion polls
and with the November 2020 presidential elections looming, US President Donald
Trump arguably needs to act before his trade war chickens really come home to
roost.
But there is little sign that
Washington and Beijing are any closer to an agreement. US demands for intrusive
enforcement mechanisms are highly unlikely to be conceded by China. Should the
talks fail again it will serve only to underline the divisions between the US
and China on the latter's industrial policies and lack of intellectual property
protection.
A continuation or even further
escalation of the trade war remains a plausible scenario, exacerbating the
demand-side shock to oil demand of weak global trade.
Alternative reality
The argument for a resolution is that
the longer the trade war goes on, the deeper the economic damage becomes and
the more likely it becomes that a deal will be done. This logic appears to
become increasingly compelling as the US presidential elections approach.
But it ignores the possibility that
neither side will make the necessary concessions. The alternative is that
US-Chinese trade antagonism becomes an enduring feature of the world economy and
Trump campaigns for re-election on the basis that he will not concede on US
trade interests.
A return to the pre-Trump status quo
looks unlikely. A key difference under Trump is that the US no longer looks for
dispute resolution through multilateral rules-based bodies, but pursues a
unilateral approach, which is intrinsically less predictable.
If a deal is done, questions will
remain over its stability. Either side might form the perception that the other
is acting in bad faith. Trump has reshaped US-Chinese relations, making them
less stable. Concessions by either side now may be seen as pragmatic, but also
as unfinished business to be addressed when the time is right.
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