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Trade War: Is $40 Oil on the Horizon?

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On Thursday, US crude oil futures fell 7.9% and settled at $53.95 per barrel—the highest decline for oil prices in a single day since February 4, 2015. In the last trading session, the United States Oil Fund LP (USO) fell 6.1%. USO tracks US crude oil futures. Tthe S&P 500 Index (SPY), the Invesco QQQ Trust (QQQ), and iShares Russell 2000 ETF (IWM) fell 0.8%, 0.5% and 1.44%. Like oil, slowdown concerns due to the trade war might have impacted SPY, QQQ, and IWM.

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Trade war dampens oil’s outlook

President Trump decided to impose a tariff on another $300 billion Chinese imports starting on September 1. The tariff ignited the large fall in oil prices. The announcement came amid trade war talks. The US might be pressuring China to agree on their terms. However, if the issues aren’t resolved quickly, it will likely dampen oil’s outlook.

Is $40 oil on the horizon?

President Trump vowed to increase tariffs more if the trade talks stall. China is the second-largest oil consumer. Most of the demand is met by imports. In the second quarter, China’s GDP growth rate slowed down to the lowest level in the last 27 years. The escalating trade war could decelerate China’s economic growth rate. Meanwhile, Saudi Arabia might reduce its crude oil official selling price for Asian countries for the second consecutive time in September, even after extending the production cut until March 2020.

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However, the tariff war has a global impact. The tariff war doesn’t just impact China. In India, the third-largest oil consumer after the US and China, the slowdown has impacted the economy. India’s auto sales data show signs of a slowdown in the economy. Based on the World Bank data, India slipped to the seventh position in terms of the world’s largest economy in 2018. Just like China, India’s GDP growth rate figure might struggle to keep pace.

Geopolitical tensions in the Middle East haven’t boosted oil prices. If there isn’t an upward thrust with the escalation in the trade war, we could see WTI crude oil close at the psychologically important level of $40. Any possibility of US crude oil below $50 could have a devastating impact on US upstream companies’ stock prices. Chesapeake Energy (CHK) planned to increase its production mix in oil to capture stronger oil prices. The company would be impacted if US crude oil falls below $50. Many analysts have reduced their target prices on Chesapeake Energy. 

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