By Barani Krishnan
Investing.com – China vowed to hit back at Donald Trump’s new tariffs, but what commodity traders didn’t bargain for was a one-two punch from Beijing that included a currency devaluation.
Oil prices slumped, with Brent crude crashing beneath key $60 support, as China allowed the yuan to tumble to its weakest level in a decade against the dollar. The Beijing action was a retaliation against Trump's plan to impose from Sept. 1 a 10% tariff on hitherto untaxed Chinese imports of $300 billion. The Xi Jinping administration added to the blow of the devaluation by ordering state-owned companies to suspend imports of U.S. agricultural products.
New-York traded West Texas Intermediate crude settled down 97 cents, or 1.7%, at $54.69 per barrel.
London-traded Brent crude, the benchmark for oil outside of the U.S., slid $2.05, or 3.3%, to $59.84.
WTI lost 8% on Thursday alone, marking its worst day since Feb 2015, right after Trump tweeted about his new tariff plan for China. Brent slid 7.2%, its most since Sept 2015. By Friday, both benchmarks rebounded sufficiently enough to pare weekly losses to just under 1% for WTI and 2.5% for Brent.
But as stock markets took a pounding on Monday from the yuan’s devaluation, oil fell anew, despite fresh tensions involving Iran that should have helped crude catch a bid from heightened supply risks.
At current levels, WTI is still up nearly 21% on the year. Brent is up 11%.
Oil and gas stocks fell sharply.
Since Sunday, Iran has been accused of seizing an Iraqi oil tanker in the Persian Gulf, accusing the vessel of smuggling fuel on behalf of unnamed Arab countries. It was the third tanker seizure in the Strait of Hormuz in recent weeks, increasing concerns that oil supply from the most important region of the global market could be disrupted.
“The market is spinning the ‘poor demand’ outlook on oil due to poor price action (despite) rising Middle East tensions,” said Scott Shelton, energy futures broker at ICAP (LON:NXGN) in Durham, N.C.
“I think the short position in WTI is growing with new CTA shorts coming in and, additionally, new macro shorts as well,” Shelton said. He added that, while Brent looked relatively “good” to him, “I am thinking that all of this means very little in the environment that we are in, which is driven by equities”.
Phil Flynn, senior market analyst for energy at the Price Futures Group brokerage in Chicago, noted that China’s weakening of its currency to beyond 7 yuan per U.S. dollar was a violation of World Trade Organization (WTO) rules and could cause capital flight out of China.
“The move will undoubtedly inspire tougher sanctions from the U.S.,” Flynn said.
“More than likely the 10% tariff that was previously announced will go to 25%. There may be also new crackdowns on Chinese technology companies. The turmoil and the fear will shake things up. The market may overreact but it should find its stability in a matter of days.”