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Oil set for weekly drop on growing fears over shale and Trump

Mar 02 2018 12:22
Sharon Cho, Bloomberg

Singapore - Oil is set for the first weekly decline since early February on fears over a shale boom and following a selloff in risk assets on concerns US President Donald Trump’s tariffs will spark a global trade war.

Futures in New York were little changed and on course for a 4.2% drop this week. Asian stocks dropped, with losses spilling over from the US session as Trump said he’ll slap tariffs on steel and aluminum imports to protect national security. The duties may also lift the cost of new oil pipelines amid swelling oil inventories and accelerating output by drillers in the US.

Oil has slipped below $62 a barrel after global risk assets were whipsawed in February. While the Organisation of Petroleum Exporting Countries and its allies continue to curb output to reduce a global oversupply, record-breaking levels of production and expanding stockpiles in the US are haunting the minds of investors.

Meanwhile, a stronger dollar also weighed on commodities priced in the currency this week.

“The increase in supplies in the US, together with a strengthening dollar, have taken their toll on prices this week,” Ahn Yea Ha, a commodities analyst at Kiwoom Securities, said by phone. “Trump has also hit the market, but prices are unlikely to fall much further from this level with OPEC’s high compliance to their agreed cuts.”

West Texas Intermediate for April delivery was down 10 cents at $60.89 a barrel on the New York Mercantile Exchange at 3:34 pm in Singapore. Total volume traded was about 18% below the 100-day average.

Brent for May settlement fell 3c to $63.80 on the London-based ICE Futures Europe Exchange. The contract fell 1.4% on Thursday. Front-month futures traded at a $3.08 premium to May WTI.

Trump’s tariffs

Trump’s plans to impose tariffs of 25% on imported steel and 10% on aluminum for “a long period of time” may be having a two-fold impact on oil. One is through the selling of global risk assets as investors fear what a global trade war could do to economic growth. The other is more directly on shale oil  pipeline makers who use foreign metal, as they’ll need to brace for price hikes.

The Association of Oil Pipe Lines forecast that steel tariffs will translate to a $76m cost increase for a typical pipeline such as the one running from West Texas to the Gulf Coast.

Mega projects - like the Dakota Access conduit between North Dakota and Illinois - would cost $300m more. As a result, some projects probably will be delayed or cancelled altogether, the Washington-based industry group said in a statement.

Risk aversion

Among risk assets, Asian stocks responded to Trump’s plans by falling the most in three weeks, after US equities posted a third day of declines. The Bloomberg Commodity Index is on course for a 0.4% drop this week, while the dollar is headed for a 0.5% increase in the period.

Meanwhile for OPEC, total output last month declined to a 10-month low, mainly due to lower production from Venezuela and an outage in the United Arab Emirates. Production from the 14 members slipped 80 000 barrels a day to 32.28 million barrels per day in February, according to a Bloomberg News survey of analysts, oil companies and ship-tracking data.

Other oil-market news:

• PetroChina agreed to an annual contract to buy Libyan crude after similar deals by oil majors like Royal Dutch Shell and BP, underscoring a recovery in the North African country’s production even as its political uncertainty persists.

• Actual growth in US crude output can be lower than what the drill-rig numbers suggest, as producers focus on profits, infrastructure constraints rise and crew shortages persist, Australia and New Zealand Banking analysts said in a report.

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commodities  |  markets  |  oil
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