Oil set for weekly drop on growing fears over shale, tariffs

By Grant Smith on 3/2/2018

LONDON (Bloomberg) -- Oil is set for the first weekly decline since early February as fears over booming shale output mingled with a broader selloff in risk assets as U.S. President Donald Trump’s tariffs threatened to spark a global trade war.

Futures in New York slipped 0.2%, putting them on course for a 4.2% drop this week. U.S. oil production reached a record of more than 10 MMbpd in November, government data showed this week. Equities fell across the globe as Trump said that trade wars are “easy to win” after announcing he’ll impose tariffs on steel and aluminum imports to protect national security.

Oil has slipped back toward $60/bbl after global risk assets were whipsawed in February. While the Organization 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 U.S. are also influencing investors. A stronger dollar also weighed on commodities prices this week.

“Those searching for a major disruptive force in the oil market need look no further than the U.S.,” said Stephen Brennock, an analyst at PVM Oil Associates Ltd. in London. “It will take a brave man to bet against the U.S. crude-export machine.”

West Texas Intermediate for April delivery was down 12 cents at $60.87/bbl on the New York Mercantile Exchange at 1:44 p.m. in London. Total volume traded was about 19% below the 100-day average.

Brent for May settlement fell 19 cents to $63.64 on the London-based ICE Futures Europe Exchange. The contract fell 1.4%, or 90 cents, on Thursday. Front-month futures traded at a $2.98 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 twofold impact on oil. One is through the selling of 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 imported metal, as they’ll need to brace for price hikes.

The Association of Oil Pipe Lines forecast that steel tariffs will translate to a $76-million 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 $300 million more. As a result, some projects probably will be delayed or canceled 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 U.S. equities posted a third day of declines. The Bloomberg Commodity Index is on course for a 0.5% 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 field maintenance in the United Arab Emirates. Production from the 14 members slipped 80,000 bpd to 32.28 MMbpd in February, according to a Bloomberg News survey of analysts, oil companies and ship-tracking data.

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