Editorial: Sanctions and tariffs

Shifting perceptions of future oil demand may explain why the end to Iran sanctions waivers failed to move prices

US foreign policy is pulling the oil market in two different directions, making forecasts of the global supply-demand balance more precarious than usual. The decision to end sanctions waivers on Iranian oil imports on 2 May will further tighten medium and heavy crude supplies. Mideast Gulf Opec producers have been equivocal about whether or not they will hike output to compensate for Iranian supply cuts, despite President Donald Trump's tweets they would do so.

The unexpected end to sanctions waivers has coincided with a number of other crude supply glitches in Russia and west Africa, while political strife erodes supplies from sanctions-hit Venezuela. Opec production in March-April was close to a five-year low, and growth in US shale output is slowing. Yet crude prices have barely reacted to the news on Iran, even falling from a peak of $74/bl two weeks ago. Pressure on prices may reflect a shift by hedge funds that increased their bearish contract positions for the first time this year at the end of April. Expectations that Saudi Arabia will step up to fill the gap have also tempered price gains.

But there may also be an underlying shift in expectations of demand. The escalating rift between the US and China and the imposition of higher import tariffs threaten the health of the global economy and growth in oil demand. Days before Chinese vice-premier Liu He arrived in Washington for another round of trade talks, angry tweets from the US president raised the possibility of a renewed trade war between the two largest economies. Existing tariffs on Chinese goods entering the US rose from 10pc to 25pc on 10 May, and this tax is likely to be extended to all trade from China, amounting to $525bn. If China retaliates with similar measures, over $650bn of world trade will be affected.

The IMF has already warned of the risks to the global economy of such an outcome. "Everybody loses in a protracted trade conflict," the organisation says. The hike in tariffs will hit key Chinese industries hard, in particular electronics, computer parts and automotive components. At the lower rate of 10pc, many companies were able to sustain sales to the US by absorbing tariffs into their own costs and reducing margins. This will become unviable after an increase to 25pc. And if China hits back with increased tariffs on US goods, US companies and consumers will be hit by higher import prices and reduced export markets. The IMF estimates that 25pc tariffs on all bilateral trade could reduce GDP in the US by 0.6 percentage points and in China by 1.5 percentage points.

The two countries together accounted for a third of world oil demand last year and for three-quarters of the increase in consumption. Any dampening of their economies — and the global economy — will feed through to oil sales. Most demand forecasts for this year have been bullish, with growth of 1.4mn-1.5mn b/d predicted by the IEA, the EIA and Argus Fundamentals. But Opec has cut its growth forecast to 1.2mn b/d, citing lower expectations for economic growth.

The new US tariffs will apply only to imports that leave China from 10 May. These will take around four weeks to reach US ports, giving the two parties some leeway to reach an agreement that might mitigate the effects on trade. The tug-of-war between supply and demand will complicate discussions on output after June when the Opec/non-Opec JMMC committee meets on 19 May. In the meantime, the oil market remains mired in uncertainty.