It will be a busy few days for the oil market, and the week started off with a bang. Oil prices shot up on Monday on news that the U.S. and China has delayed the trade war, as well as on increasing odds of deal in Vienna.
A lot of news came out of Buenos Aires over the weekend at the G20 summit. President Trump met with Xi Jingping where they hashed out a deal on trade. Or, so it seems. The White House called it a “highly successful meeting,” and Trump was quick to declare victory.
The meeting was widely hailed as a thaw in relations, with much of the press billing it as a “truce.” But the deal isn’t so much a deal as it is a delay in the trade war. The U.S. has decided to hold off on hiking tariffs on $200 billion worth of Chinese imports from 10 to 25 percent, which had been scheduled to take effect in January. China, in turn, promised to increase imports from the United States.
However, China was careful enough not to get locked into specifics. By Monday, signs that there were some misunderstandings about what the two sides agreed to quickly became apparent. Trump boasted that tariffs on U.S. autos going into China would fall from 40 percent to zero. China did not confirm that, and by all accounts, that is a concession too large for Beijing to countenance, at least at this stage.
More to the point, the same issues that have divided the U.S. and China on trade – intellectual property issues, China’s industrial policy, and more – remain. In fact, there has been very little progress on these overarching issues. For Trump, the decision to hold off on a trade escalation was borne out of political panic after the announced closure of several GM factories, growing unease from farm country, and sweeping losses in the mid-term elections.
So, the pause button allows the White House to buy some time on tariff hikes. But only 90 days. Many trade watchers find it hard to believe that Washington and Beijing can settle longstanding differences on trade in just three months, especially since there has been no discernible progress throughout 2018 amidst several rounds of tariffs, nor has there been progress over several years of on and off negotiations.
The Trump administration itself is also divided internally. The not-so-secret gulf between free-traders like Secretary of Treasury Steven Mnuchin and Larry Kudlow on the one hand, and trade adviser Peter Navarro and U.S. Trade Representative Robert Lighthizer on the other, remains.
In fact, Trump has appointed Lighthizer to be the point person to lead the talks with China over the next few months, which makes it unlikely that the U.S. and China will simply back away from the cliff. He is very upfront about his hardline trade beliefs vis-à-vis China. There will need to either be a sweeping deal that results in major changes in trade practices, or the trade war will resume.
Nevertheless, judging by the reaction of global financial markets, Wall Street desperately wants to believe that the trade “deal” reached over the weekend was for real. Stocks soared on the news.
To be sure, the delay of the tariff increase is important, even if it is temporary. The scheduled increase of tariffs from 10 to 25 percent on Chinese goods will lessen the economic damage from Trump’s trade war. It also increases the political cost of returning to a bellicose position on trade. Trump and Xi both want to end the trade war, even if it’s hard to imagine what a resolution might look like.
Oil traders also welcomed the news. Trade protections have slowed commodity demand, and have been a major headwind to the global economy, according to the IMF. The agreement between Trump and Xi, such as it is, is positive for oil prices.
Meanwhile, in what would normally be the headline news, Russia and Saudi Arabia apparently reached a deal to cut oil production at the upcoming OPEC+ meeting in Vienna. Russian President Vladimir Putin said that Russia would go along with output curbs, although the specific levels have not been agreed to. “We have an agreement to extend our deal,” Putin said on Saturday after a meeting with Saudi Crown Prince Mohammed Bin Salman in Argentina. “There is no final decision on volumes, not yet.”
The comments suggest a deal is highly likely later this week. “While no volumes or cut were specifically mentioned, we view this as the political agreement needed for the cuts to go through and reiterate our view that such a cut in production will be agreed upon this week in Vienna,” Goldman Sachs wrote in a note.
In short, the G20 meeting in Argentina provided a lift to oil markets, even if some of the specifics still need to be hashed out.
By Nick Cunningham of Oilprice.com