Oil declines as traders assess Opec compromise and Trump tariffs

Tokyo

OIL dropped below US$66 a barrel as traders assessed the Organization of Petroleum Exporting Countries' (Opec) discussions on a compromise over an output increase as well as escalating trade tensions between the world's two biggest economies.

Futures in New York fell 0.9 per cent after a 1.2 per cent gain on Monday. Opec is aiming for a modest production boost in a bid to bridge the gap between Russia's push for a big gain and Iran's insistence that no change is needed. Meanwhile, the prospect of a US-China trade war rattled global financial markets after President Donald Trump directed American officials to identify another US$200 billion worth of Chinese goods for additional tariffs.

Crude oil has been whipsawed this month amid speculation that the growing trade spat between the US and China could curtail economic expansion and limit oil demand growth, and as Saudi Arabia and Russia signalled plans to raise production. Prices in London have lost more than 3 per cent this month ahead of an Opec meeting on Friday in Vienna where members will discuss easing production curbs in place since early 2017.

"While according to press reports the size of the output increase under discussion is pointing to a hike of 300,000 to 600,000 barrels a day, you can never be sure about the outcome of the Opec meeting until it ends," said Satoru Yoshida, a commodity analyst at Rakuten Securities Inc, in Tokyo. "Given the huge potential negative impact of a tit-for-tat trade war between the US and China, the situation needs to be closely monitored."

West Texas Intermediate (WTI) for July delivery fell as much as one per cent to US$65.18 a barrel on the New York Mercantile Exchange, and traded at US$65.24 at 3.43 p.m. in Tokyo. The contract added 79 US cents to US$65.85 on Monday. Total volume traded was about 6 per cent below the 100-day average.

Brent futures for August settlement lost as much as 73 US cents, or one per cent, to US$74.61 a barrel on the London-based ICE Futures Europe exchange. Prices on Monday gained 2.6 per cent to US$75.34. The global benchmark crude traded at a US$9.59 premium to WTI for the same month.

Futures fell 1.7 per cent to 459.1 yuan (S$96.30) a barrel on the Shanghai International Energy Exchange. Trading on the gauge was closed for a Chinese public holiday on Monday.

In a White House statement on Monday evening, Mr Trump said that he had instructed the US Trade Representative's office to identify US$200 billion in Chinese imports for additional tariffs of 10 per cent. China quickly promised to retaliate with "strong" counter measures if the America rolls out new duties.

US equity futures and Asian stocks declined on the news while safe-haven assets such as gold and the yen climbed.

Meanwhile, investors are also awaiting what could be one of the most contentious Opec meetings in recent history as discussions over whether to increase output heats up. Saudi Arabia's Energy Minister Khalid Al-Falih said that it is "inevitable" that Opec and allies will agree to gradually boost output, while Iran threatened to veto a proposal with Iraq and Venezuela.

Despite Iran's opposition, officials from a number of other countries are optimistic that an agreement can be won for a relatively modest hike at this week's meeting in Vienna, according to people briefed on the talks, who asked not to be named discussing private conversations. BLOOMBERG