OIL FUTURES: Crude falls on China’s retaliatory tariffs against the US

Crude oil futures plunged in the midafternoon Asian trade Feb. 4 following retaliatory escalation in tariff wars and heightened market volatility.

At 3:51 pm Singapore time (0751 GMT), the ICE April Brent futures contract was down 69 cents/b (0.91%) from the previous close at $75.27/b, while the NYMEX March light sweet crude contract was down 117 cents/b (1.6%) from the previous close at $71.99/b.

In a retaliatory strike against the latest US-imposed tariffs on Chinese imports, Beijing announced tariffs of 10% on US crude oil, agricultural machinery and vehicles, and 15% on US coal and liquefied natural gas on Feb. 4. These tariffs will come into effect on Feb. 10.

"Higher tariffs typically translate to higher oil prices, which could weigh on economic activity and demand," Priyanka Sachdeva, senior market analyst at Phillip Nova said.

Conversely, further tariff threats could adversely impact global demand, thus exerting downward pressure on crude oil futures prices.

"This tariff retaliation by Beijing inadvertently ups the ante on an escalatory tit-for-tat trade conflict should Trump exercise the clause in his Executive Order to lift tariffs in response to retaliation," Vishnu Varathan, managing director at Mizuho said.

Meanwhile, the Trump administration retracted its tariffs on Canada and Mexico late Feb. 3, delaying the imposition by minimally 30 days with an understanding for both the US's neighboring countries to undertake border initiatives. The previously imposed tariffs, which were announced Feb. 1, were otherwise supposed to come into effect Feb. 4.

"Well, what can I say, the only thing predictable right now is Trump being unpredictable," Phillip Nova's Sachdeva said.

"Just as trade tensions seemed poised to escalate into a tit-for-tat trade war, tensions quickly eased as Mexico and Canada managed to secure a one-month delay in tariffs in the brink of time," Yeap Jun Rong, market strategist at IG said.

Analysts expect traders to be following the latest of Trump and his tariff threats closely, making it a headlines-driven market.

The stark difference in outcomes for China as compared to Mexico and Canada comes as no surprise to some analysts.

"Crucially, the overarching geo-economics dimensions to US-China trade means that resolution will be far more fraught than is the case with Mexico and Canada ... In particularly the position that the US assumes on China is likely to be driven by strategic, zero-sum-game geo-economic calculus," Varathan from Mizuho said.

"This may involve an adversarial loss maximization to be inflicted upon China rather than profit maximization or loss minimization being prioritized for [the US]. And this makes all the difference," Varathan added.

Nonetheless, "the unpredictability of Trump's policies suggests another volatile year for oil markets. While tariffs may push oil prices higher, the broader economic slowdown and inflationary pressures could offset some gains," Sachdeva added.

Dubai crude

Dubai crude swaps and intermonth spreads were higher in mid-afternoon Asian trading Feb. 4 from the previous close.

The April Dubai swap was pegged at $73.84/b at 2:15 pm Singapore time (0615 GMT), down by $1.46/b (1.94%) from the previous Asian market close.

The March-April Dubai swap intermonth spread was pegged at 94 cents/b, narrower by 11 cents/b over the same period, and the April-May Dubai swap intermonth spread was pegged at 71 cents/b, narrower by 9 cents/b over the same period.

The April Brent-Dubai exchange of futures for swaps was pegged at $1.27/b, narrower by 28 cents/b over the same period.