Oil erases advance after US tariff hike dampens demand outlook

[SINGAPORE] Oil erased a gain after the US went ahead with a planned tariff increase on Chinese goods, while rising tensions in Iran and elsewhere kept the supply outlook tight and prevented steeper losses.

Futures in New York were steady after being up by as much as 1.3 per cent earlier. China said it would be forced to retaliate after levies on some US$200 billion of its imports were increased to 25 per cent from 10 per cent. Negotiators from the two countries will meet again on Friday in Washington.

In a sign that supply could be tighter than expected, Iran's oil shipments have tumbled this month with not a single ship seen leaving the nation's oil terminals for foreign ports, according to tanker tracking data compiled by Bloomberg.

Oil has swung between gains and losses this week as investors tried to assess if there was still a chance for a US-China trade deal after the White House said it planned to raise tariffs.

Rising tension between Washington and Tehran, Russia's crude contamination crisis and the likelihood of output from Venezuela continuing to drop are pointing toward a tighter supply situation.

It would be "very bearish for oil prices if the talks break up tomorrow without any concrete progress", said Jeffrey Halley, a senior market analyst at Oanda Asia Pacific in Singapore.

"We don't see a wholesale run for the exits because there is still this hope something will come from the talks tomorrow," Mr Halley said.

West Texas Intermediate (WTI) crude for June delivery declined 3 US cents to US$61.67 a barrel on the New York Mercantile Exchange at 12.56pm in Singapore after climbing as much as 79 cents earlier. The contract is down 29 cents, or 0.5 per cent, since May 3, heading for a third straight weekly drop.

Brent for July settlement fell 8 cents, or 0.1 per cent, to US$70.31 a barrel on the London-based ICE Futures Europe exchange after closing little changed on Thursday. The global benchmark contract is trading at US$8.53 premium to WTI.

While the trade talks ended without drama on Thursday, the ball is now in China's court after Washington increased levies.

The Asian nation hopes it can resolve issues with the US through cooperation and negotiation, the country's Commerce Ministry said in a statement after the tariff hike. A gauge of Asian stocks erased gains after levies were increased, while the Bloomberg Commodity Index managed to stay in the green.

As well as Iran and Venezuela, there have been unexpected disruptions in Russia and Nigeria, and it's still uncertain to what extend Saudi Arabia will increase its production.

The tight supply situation is being reflected in Brent's three-month oil timespread, which is at the widest backwardation - where the forward price is lower than the prompt price - in almost five years.

There are underlying supply issues because of Iran and Venezuela, but at the moment the market is focused on the US-China trade talks, Daniel Hynes, a senior commodity strategist at ANZ Banking Group in Sydney, said before the tariff increase.

BLOOMBERG