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    Oil Prices Retreat Amid OPEC Concerns, Looming China Duties

    © AFP 2019 / FREDERIC J. BROWN
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    China’s threat to slap tariffs on US crude, an upcoming OPEC meeting and Federal Reserve policy tightening have all weighed on international oil prices over the past few days.

    Kristian Rouz — Crude prices in North America are on the decline after the Chinese government announced it's considering import tariffs on US oil in the most recent round of escalation in the ongoing bilateral trade dispute between Washington and Beijing.

    Meanwhile, in London, Brent oil tumbled as well amid expectations that Saudi Arabia and Russia could agree to relax the negotiated production caps and increase their crude output.

    READ MORE: Didn't See That Coming: China Threat of New Crude Oil Tariff a Surprise in US

    Futures for West Texas Intermediate (WTI) blend slid to their lowest since April, to $63.59/bbl overnight on Monday, subsequently rebounding to $63.83/bbl by early morning. Overall, this was still a 1.9-percent drop, as investors believe Beijing might deliver on its threats.

    Mainland China has become one of the largest consumers of US oil since late 2015 but has remained a top consumer of oil from the Middle East. The recent decision by US President Donald Trump to exit the Iranian nuclear accord and re-impose sanctions on Tehran has given China the option of either cutting its trade ties with Tehran or risking exposure to secondary US sanctions.

    Some investors say China might opt to retain its consumption of Iranian oil after the US brings back its oil embargo against Tehran. In this case, US oil exports to China would be in jeopardy anyway, meaning Beijing's retaliatory tariffs against US crude only make sense in the near-term, despite being likely.

    "Crude oil prices crashed as US-China trade tensions escalated last Friday," Benjamin Lu of Phillip Futures in Singapore said. "These punitive measures on bilateral trade have unnerved investors as it hurts global economic growth."

    This also comes after US President Trump slapped new tariffs on $50 bln in Chinese trade last week; these duties go into effect on July 6. Beijing has already confirmed it's weighing a package of reciprocal measures.

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    Meanwhile, the talks within the OPEC and between OPEC leader Saudi Arabia and Russia have kept energy investors on alert. Over the past few weeks, international crude prices have approached Saudi Arabia's breakeven level and far surpassed the ‘comfortable' for Russia price of $60/bbl.

    Some say Saudi Arabia and Russia could ramp up their extraction to capitalize on the favorable market environment, albeit in the near-term. OPEC and several non-OPEC oil producers have kept caps on their oil output since early 2017 in hopes of supporting prices in the face of the rising US production and exports.

    Subsequently, Brent oil dropped 1.1 percent to $72.67/bbl on Monday in London.

    "Most industry observers are expecting a production rise," Stephen Innes of the futures brokerage OANDA said. "The magnitude and timing of the boost remain uncertain."

    The leaders of OPEC and Russia are slated to meet in Vienna on June 22 to discuss further policies, and some investors have exited their energy assets in the anticipation of the meeting.

    The third important factor that has put downward pressure on global oil prices is US Federal Reserve policy. The ongoing tightening cycle and interest rate hikes have pushed the US dollar higher against its peers, rendering dollar prices for commodities lower. This has also affected oil, as well as a selection of emerging market currencies, which are often dependent on commodity trading.

    "And that really caused the euro to take a dip and the dollar to go up, which is putting downward pressure on prices," Phil Flynn of Chicago-based Price Futures Group said.

    On the other hand, geopolitical risks, the rising demand for fuel and energy in the US, as well as an overall pickup in global economic growth are driving the demand for oil, supporting prices at around their current levels. Crude prices are likely to remain highly volatile in the upcoming months, reflecting investor perceptions of global news.

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    oil, OPEC, United States, China
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