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Sino-American trade deal and barreling crude 2020

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Oil price, NigeriaBy Sonny Atumah

The orchestrated phase one China-United States trade deal that would partially suspend trade tariffs was signed last Wednesday in Washington. President Trump and Chinese Vice Premier Liu. He signed the new, fully-enforceable Phase One Trade Agreement at the White House.

As part of the deal, the United States will cut in half 15 percent tariffs imposed on a wide range of consumer goods imposed in September and canceled another round that was set to take effect in December, but others remain in effect. China agreed to make significant structural reforms in a wide range of critical areas. This agreement will begin rebalancing the trade relationship with China and provide new opportunity for American businesses and farmers.

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In the new agreement, China pledged to increase imports of American goods and services by at least US$200 billion over the next two years, and to continue after 2021. In this deal, China will be making purchases of United States manufactured goods, including aircraft, autos and car parts, agricultural machinery, medical devices, energy, and services.

China agreed to open its financial services sector more widely to U.S. firms, and to refrain from deliberately pushing down its currency to gain a trade advantage. The deal includes pledges by China to forbid the forced transfer of American technology to Chinese firms as well as to increase protections for U.S. intellectual property.

China and the United States have been locked on issues of trade war. President Donald Trump belief was that for over 25 years China was killing the United States with unfair trade deals; allegedly taking hundreds of billions of dollars out yearly, and stealing intellectual property. Section 301 of the United States Trade Act of 1974 allows the president to levy sanctions against countries that break trade agreements or respond to unfair, unreasonable or discriminatory trade practices.

The Chinese on the other hand accused America of unilateralism and trade protectionism measures in the imposition of increased tariffs to hinder China’s economic development. The China-United States trade war which started on July 6, 2018 is the economic disagreement that made the two countries imposes import restriction to harm each other’s trade.

Analysts say the deal stops short of addressing the core United States complaints about China’s trade and intellectual property practices that prompted the Trump administration to pressure China for changes. To them, the deal contains no provisions to rein in rampant subsidies for state-owned enterprises, which the administration blames for excess capacity in steel and aluminum and says threaten industries from aircraft to semiconductors. It also fails to address digital trade restrictions and China’s onerous cyber security regulations that have hobbled U.S. technology firms in China. The trade war between the two economic superpowers had hit hundreds of billions of dollars in goods, slowed global economic growth and roiled financial markets.

The trade war had put the global economy in vacillation resulting in oil supply and demand dynamics that is in a cliffhanger. Analysts say every twist and turn of the trade war had enormous influence over oil prices, and the thaw in economic relations between the two would be a boost in 2020.    The tariff reduction between the United States and China also points to an easing of economic tensions. The relationship between the two economic superpowers is indeed, complicated and difficult to understand. China is a proxy party in the United States-Iran feud. China is the world’s number one oil importer and major buyer of Iranian oil. China is against the unilateral decision of America to impose crippling sanctions on Iran to curb Iran’s nuclear ambitions. How the United States punishes Chinese companies over sanctions breaches of Iranian oil purchase is a matter of conjecture. President Trump refused to deploy the security codes ordinarily at a United States president’s disposal as threat of war with Iran interjected the New Year celebrations a fortnight ago.  A backlash would have lead to tensions in the Middle East. Trump might have been hamstrung by his 2020 re-election bid by ensuring unfettered support for the oil and gas geopolitics for which China appears to be an intriguer.

Even with the trade deal analysts and researchers project that the global economy that had slowdown may deaden oil demand that is witnessing surplus crude inventory. The situation of China’s reduced growth rate may cause oil prices to fall in 2020.

Data has shown that growth in China reduced to 6.2 percent, the weakest in 27 years.  Oil Price reports that oil demand slow down from a major consumer like China, signals a slump in prices. China’s oil demand may only grow by 2.4 percent this year, down from 5.2 percent in 2019, according to forecasts of China’s biggest oil firm, state-controlled China National Petroleum Corporation (CNPC).

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That will also be the weakest growth rate since the global financial crisis of 2008. China has amassed an enormous strategic oil reserve in the last few years, growing from 191 million barrels in 2015 to as much as 800 million barrels last year. China’s import demand was bolstered by this stockpiling; should it slow down or cease altogether it would amount to demand reduction.  The American Petroleum Institute (API) has estimated surprise crude oil inventory build of 1.1 million barrels for the week ending January 10. The shale drillers are contributing significantly even with financial challenges.

Vanguard

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