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Oil rattled by trade war sets price on course for weekly slump

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Oil is poised for the biggest weekly loss in almost five months after escalating trade tensions between the US and China rattled investors while Libya's plans to boost output allayed some fears of a supply crunch.

[TOKYO] Oil is poised for the biggest weekly loss in almost five months after escalating trade tensions between the US and China rattled investors while Libya's plans to boost output allayed some fears of a supply crunch.

Futures in New York plunged 4.8 per cent this week as US President Donald Trump doubled down on a trade war with China by threatening tariffs on nearly half of all American imports from the Asian nation. Short-term bearish signals for oil prices on the supply side include Libya restarting a key oil field that had been shut since February, tempering the International Energy Agency's warning that spare capacity may be stretched to the limit.

Oil has surged to fresh three-year highs the last few weeks as disruptions and renewed US sanctions on Iran raise the risk of a supply shortfall. Opec's Gulf members may need to pump almost as much crude as they can to cover swelling output losses, the IEA said. While the US and China signaled they are open to resuming talks, uncertainty continues to swirl over whether the trade conflict between the world's two biggest economies will jeopardize oil demand.

"While the problem is that the US-China trade war could reduce global oil demand, it could take time until that happens," Takayuki Nogami, chief economist at state-backed Japan Oil, Gas & Metals National Corp, said by phone from Tokyo. "On the other hand, the output declines can happen fairly quickly, so that might have a bigger immediate impact on the market."

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West Texas Intermediate crude for August delivery traded at US$70.22 a barrel on the New York Mercantile Exchange, down 11 cents, at 3.58 pm in Tokyo. Total volume traded was about 46 per cent below the 100-day average.

Brent for September settlement lost 41 cents to US$74.04 on the London-based ICE Futures Europe exchange. Prices are down 4 per cent this week. The global benchmark traded at a US$4.79 premium to WTI for the same month. Long-dated Brent contracts suggested lower demand. The premium for the front-month Brent contract traded over the following month's settlement fell from a high in April to a discount this week in a condition known as contango.

Futures for September delivery were little changed near 490 yuan a barrel on the Shanghai International Energy Exchange. The contract fell 0.9 per cent this week.

Oil prices plunged earlier this week, with Brent posting its biggest one-day drop in more than two years on Wednesday, after Mr Trump released a list of US$200 billion worth of Chinese products that could face additional tariffs. Global risk assets sold off as China vowed to retaliate, though it hasn't yet outlined exactly how it will respond.

Meanwhile, there are signs supply disruptions that helped oil's rally earlier this month are easing in some places. Opec member Libya is set to restart production from its El-Feel field. The country's National Oil Corp lifted force majeure at the field, which will boost output to 50,000 barrels a day within two days and to 72,000 barrels three days later, the company said in a statement.

Also, Syncrude Canada Ltd is said to have increased its July production forecast at its oil-sands upgrader in Fort McMurray, Alberta, after a transformer failure led to a shutdown in June. That comes after various disruptions from longer-than-anticipated maintenance to power outages due to a blast roiled operations at Canada's second-oldest oil sands mine.

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