US-China trade tensions and increasing US crude oil inventories are driving the decline
Oil prices have dropped to a one-month low within the range of US$72.76-US$76.77 per barrel. This reflects a mix of economic, geopolitical, and supply-related factors. The drop raises concerns about crude oil’s global demand, US-China trade tensions, and rising inventories in major markets.
Main Factors Driving the Decline
There are many reasons behind the recent oil price fall:
US-China Trade Tensions
The continuation of the United States and China’s trade war is an integral factor that spurred the latest crude oil price. The United States increased its secondary tariffs on exports from China. As a result, the demand in China for US crude oil decreased.
This sent shockwaves on US West Texas Intermediate (WTI) crude prices, which dropped by 2.77% to US$71.13 per barrel. Not even Brent crude, the global benchmark, was spared. The uncertainty surrounding trade policy has bred cautious market sentiment, and that further weakened oil prices.
Rising US Crude Inventories
One major cause of the recent price decline is an increase in US crude oil inventories. Reports indicate that US crude stockpiles have increased by about 2.4 million barrels, showing oversupply in the market. When the supply is greater than the demand, prices tend to decline. This happens because the buyers now have a lot of options and are not in a hurry to buy at higher prices.
Bearish Market Sentiment and Economic Concerns
Global economic uncertainty gives rise to bearish market sentiments. Investors are afraid of the slump that trade disputes, inflationary concerns, and fluctuations in the requirement for crude oil may cause.
China has retaliated recently with tariffs on US crude oil imports, which has further increased the volatility in the market. The impact on overall US exports is expected to be limited. However, uncertainty over global trade relations continues to influence oil prices.
OPEC+ Production Levels and Global Supply
OPEC+ has been trying to maintain oil prices by controlling production. However, the production by other countries is balancing that. The US and Canada keep increasing their production volume, creating global oversupply.
OPEC+ has not been able to enforce the reduction in the output of its member countries. Analysts believe the oversupply condition will remain unless there is an adjustment in production. The condition is expected to prevail for another two years and the prices will remain low until 2025.
Effect of Tariffs on Oil Prices
Chinese Retaliation and Market Reactions
China’s 10% tariff on US crude oil will take effect on February 10, 2025. This will probably reduce demand for American crude in the Chinese market because China has traditionally been one of the biggest buyers of US crude oil. The decision may shift trade routes and force the US to redirect exports to other countries.
Furthermore, although the touted tariffs started an inflationary trend initially, analysts argue that the total effect might be limited. The US shipment of crude oil to China has already declined from 450,000 barrels per day in 2020 to around 180,000 barrels per day in 2024. This will make the new tariffs less disastrous than expected.
Shift in Global Trade Dynamics
As US crude oil exports to China, producers are now scrambling elsewhere. Europe and South Korea are among the most critical buyers of American crude, thus balancing some lost demand from China. South Korea alone now imports about 500,000 barrels per day from the US.
As US crude makes up a relatively minor share of around 1.7% of China’s total imports, the latter was bound to see little disruption. Otherwise, it continues to import more and more from Russia, Saudi Arabia, and other core suppliers, going further towards diversifying its energy sources.
US Tariff Cancellation and Market Stability
Relief from Canadian and Mexican Oil Tariffs
A recent US government decision to suspend its tariffs on oil imports from its two northern neighbors, Canada and Mexico, has helped to stabilize North America’s energy market. The proposed imposition of 25% tariffs on Mexican oil and 10% on Canadian energy imports had stirred up a hornet’s nest among refiners and consumers.
This cut in the tariff pause caused a slight oil price fall, as Brent fell to 0.87% and fetched US$75.30 per barrel, while WTI fell by 1.54% and traded at US$72.03 per barrel. Thus keeping crude flows from two of the most important US suppliers stable.
Short-Term Effects
The reprieve on tariffs may give short-term relief. However, experts warn the country is only going to risk continued trade wars without diversifying exports beyond the US. If and when the tariffs return, domestic fuel prices would likely increase higher for US refineries, too.
Future Forecast of Oil Price
Building Inventory and Fear of Demand
US crude oil inventories are likely to keep increasing over the coming weeks. Analysts have estimated that there will be a buildup of 1.3 million barrels. This trend, coupled with continuous uncertainty over trade policies, may further put downward pressure on the oil price.
Gasoline inventories are also increasing steadily, which might suggest an oversupply in the markets for refined fuel. Distillate fuel stock is expected to decline marginally, balancing out market conditions a little.
China’s Oil Import Strategy is Evolving
China is the world’s largest crude oil importer, and the country is gradually changing its source of supply. U.S. crude oil imports to China have increased from levels seen in 2022 but are still tiny compared to Russian and Saudi supplies.
In 2023, Russia supplied 19% of the total crude imported into China, and Saudi Arabia supplied 7%. China also imports increasingly large quantities from Iran and Brazil. All these indicate a shift and a diversification of energy imports, meaning US crude oil will probably play a minor role in China’s long-term energy strategy.
Conclusion
The recent fall in oil prices can be attributed to rising US crude inventories and increasing US-China trade tensions. Short-term fluctuations are expected to continue, while long-term trends point to more volatility due to changing geopolitical and economic factors.
Unless there is a significant shift in the demand and supply dynamics, oil prices may continue to be under downward pressure in the near term. Global trade tensions and production levels are likely to fluctuate further. Oil prices will continue to be sensitive to policy changes and economic developments in the energy market shortly.
