The oil market is “tightening up,” but the Trump administration could still spoil oil prices if its aggressive trade war against China drags down economic growth.
The trade war could hit the oil and gas markets in several ways. First, the back-and-forth escalation of tariffs could drag down economic growth. The first round of tariffs, which hit $50 billion in Chinese goods, targeted a relatively narrow set of products. But the latest $200 billion in tariffs will raise the cost for a wide array of consumer goods in the U.S., which could slow the economy. Specific industries that are affected by the tariffs will see more concentrated damage.
Second, oil and gas are likely to be specifically affected by the trade war, which wasn’t the case in the previous rounds of tariffs. China announced $60 billion in retaliatory measures on Tuesday, which included a 10 percent tariff on imported LNG from the United States.
The problem with the trade fight is that once the tariffs are in place, there is pressure on both sides not to back down. That doesn’t bode well to a swift resolution of this conflict.
Over the longer-term, the tariff upends the economics of building new LNG export terminals in the United States. China has emerged as the main driver of LNG demand growth, and any new export terminal located anywhere around the world likely has China at the center of its calculations.
For now, China has declined to put tariffs on U.S. crude oil. In fact, China has stepped up purchases of oil from the United States over the past two years. However, Beijing could be reserving that option for the next round of escalation, such as in retaliation for the potential $267 billion in further tariffs that Trump has threatened.
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