The Daily Dose; The Return of Trade Tensions

-China’s oil purchases off the US mark.

-Spread tightening shows easing supply-side fears.

Crude oil prices are pointing to a balancing market, structurally speaking. The six-week calendar spread for Brent has collapsed from $6 per barrel in early April to less than 70 cents. The tighter the spread, the tighter the market. OPEC+ curtailments and production setbacks in the United States have cut into global supplies, with the latest US federal data showing a steep drop in inventory levels for the week ending May 15. The development points to a market turnaround from April, when global lockdowns left crude oil stuck in storage. The slow exhale of relief has created room to politicize an international crisis. That in turn has allowed trade concerns to trickle back into the fray, jeopardizing an already fragile economic recovery. And in a sign that globalization is under attack, a new White House paper says that, with China, engagement no longer works.

Brent crude oil is mounting a remarkable comeback from the historic lows in the upper teens last month to establish a floor of around $30 per barrel. Month to date, the global benchmark is up a whopping 44%. After EIA data showed a sizeable draw on inventories, Brent was up some 1.9% to $36.44 per barrel.

“Instead of running out of storage, Cushing, Oklahoma, saw a massive 5.57 million barrel draw, the largest ever draw at the NYMEX delivery point,” Phil Flynn at The Price Futures Group in Chicago said in his morning newsletter. “Falling U.S. oil production and OPEC Plus cut compliance, along with robust global demand, has us on a healthy upward track.”

The calendar spread shows a tightening market, with most major producers restrained by either voluntary coordination or by market forces. So far, OPEC+ curtailments are by the books. In the US, the Baker Hughes rig count has dropped more than 50% since March 17 to around 340, the lowest level since the company started keeping track in 1987. For better or worse, the US retraction is easing supply-side pressures. The US restraint comes with some interesting twists. Continental Resources, one of the largest players in the Bakken shale patch in North Dakota, simultaneously cut its own production while calling for state-mandated rationing. The US is exporting more too as global demand picked up. EIA data show US crude oil exports last month were up 30% from April 2019.

But not all of that crude oil is going to China. A report from the Peterson Institute for International Economics found that China through March imported some $87 million worth of energy products from the United States of the target of $6.3 billion outlined in the so-called Phase 1 trade deal.

“Through the first three months of 2020, China’s purchases were thus only at 7% (US exports) or 1% (Chinese imports) of their year-to-date targets,” the report read.

Signed in January, the partial trade deal resolved an 18-month trade war that had analysts concerned that tensions between the two leading economies would cause lasting damage to the health of the market. US President Donald Trump on signing the deal said the truce righted “the wrongs of the past” and was a win for the American economy.

That sentiment didn’t last. Washington has continued to put pressure on the Chinese economy and is now tacitly blaming Beijing for the coronavirus pandemic. Trump in a barrage of complaints on social media accused Beijing of “mass worldwide killing,” and the US State Department said the Chinese government was blatantly challenging the privacy of American taxpayers. In a White House strategy paper, the Trump administration put its America-first agenda on display by saying engagement with Beijing could no longer work. Countering the narrative, Guo Weimen, a Chinese government spokesperson, said “it makes no sense and is very narrow-minded to accuse China of propagandizing or trying to take global leadership”.

Amid the global crisis, it is irresistible in some circles to avoid blame deflection. With US jobs collapsing at a rate of about 2 million a week and global supply chains strained in the quarantine economy, a rekindled cold economic war between China and the United States will only add to the strain. When the dust settles, it may show that other powers such as Russia have found an advantage.

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