Oil Retreats Below $59 as U.S.-China Trade Hostilities Escalate

(Bloomberg) -- Oil resumed declines as an intensification of trade hostilities between the U.S. and China stoked fears of slowing global growth, overshadowing analyst’s forecasts for a drop in American crude inventories.

Futures in New York lost as much as 1.4% after rallying 2.1% since the close on Thursday. Chinese media suggested on Wednesday the nation could restrict rare earth exports to the U.S.. American crude inventories are forecast to have fallen last week, following two weeks of gains, according to the median estimate in a Bloomberg survey. Meanwhile, U.S. National Security Adviser John Bolton blamed Iran for attacks on oil tankers near the Persian Gulf this month.

The worsening trade conflict has weighed on the global growth outlook, pushing down oil and riskier assets. That’s dominating the narrative even as the physical crude market remains tight and multiple supply risks including the tension in the Middle East lurk in the background. Output cuts by the Organization for Petroleum Exporting Countries and its allies expire at the end of June, with the group likely to set the course for the rest of the year at a meeting in early July.

“The rebound we saw earlier this week was never likely to gain too much momentum with so much concern about this trade war escalating further,” said Daniel Hynes, a senior commodity strategist at Australia & New Zealand Banking Group Ltd. in Sydney. “We have the OPEC meeting not that far away so anything coming out of Saudi Arabia will be closely followed.”

West Texas Intermediate crude for July delivery fell 68 cents, or 1.2%, to $58.46 a barrel on the New York Mercantile Exchange at 7:44 a.m. in London after dropping as much as 80 cents earlier. The contract closed 0.9% higher on Tuesday.

Brent for July settlement dropped 55 cents, or 0.8%, to $69.56 a barrel on London’s ICE Europe Futures after closing unchanged on Tuesday. The global benchmark crude was trading at a $11.10 per barrel premium to WTI, near the widest gap in almost a year.

The U.S. shouldn’t underestimate China’s ability to fight the trade war, the People’s Daily, a flagship newspaper of the ruling Communist Party, said in an editorial Wednesday. The People’s Daily, along with Global Times and Shanghai Securities News, all indicated that Beijing is gearing up to use its dominance of rare earths, which are used to make electronics more efficient, in its trade battle with Washington.

Investors are becoming increasingly alarmed about the potential economic fallout from the worsening trade war. Asian stocks snapped a three-day gain following a sell-off on Wall Street on Tuesday as warning signals in the bond market revived fears the American economy is headed for a recession.

U.S. crude stockpiles are forecast to have fallen by 500,000 barrels to 476.3 million barrels in the week to May 24, according to the Bloomberg survey. The official Energy Information Administration data is due on Thursday.

Security Adviser Bolton told reporters in Abu Dhabi the attackers had used naval mines almost certainly from Iran. The Trump administration was trying to be “prudent and responsible” in its response, he said.

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