Oil falls on U.S.-China tensions over Hong Kong

[May 27, 2020]  By Bozorgmehr Sharafedin

LONDON (Reuters) - Oil prices fell on Wednesday after U.S. President Donald Trump said he was working on a strong response to China's proposed security law in Hong Kong.

A potential deterioration in relations between the world's two biggest economies could ratchet up the pressure on global businesses and oil demand already weakened by the coronavirus pandemic.

Brent crude <LCOc1> fell 47 cents, or 1.3%, to $35.70 a barrel by 1106 GMT and U.S. West Texas Intermediate (WTI) crude <CLc1> was down 32 cents, or almost 1%, at $34.03.

"As much as oil fundamentals are improving, there are still several flies in the bullish ointment. They include the latest uptick in U.S.-China tensions," said Stephen Brennock of oil broker PVM.

"The threat of a fresh U.S.-China trade war is no longer just a tail risk and could spell disaster for risk assets."

Gloomy forecasts over the economic impact of the pandemic also weighed on crude prices.

The euro zone economy is likely to shrink between 8% and 12% this year, European Central Bank President Christine Lagarde said, warning that a mild scenario was already outdated and the outcome would be between medium and severe.

(GRAPHIC: Demand/supply balance - https://fingfx.thomsonreuters.com/
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An employee holds a sample of crude oil at the Yarakta oilfield, owned by Irkutsk Oil Co, in the Irkutsk region, Russia on March 11, 2019. REUTERS/Vasily Fedosenko//File Photo

Traders were also paying attention to early signals on a meeting between the Organization of the Petroleum Exporting Countries and its allies in less than two weeks.

The group, known as OPEC+, is cutting output by nearly 10 million barrels per day (bpd) in May and June, but the question is whether it will continue to do so as demand recovers after the easing of coronavirus lockdowns in many countries.

"Stock builds are falling and the market will be balanced in June, so who wants to willingly forego millions of crude barrels in sales if he's able to sell it in a recovering market," said Rystad Energy's head of oil markets, Bjornar Tonhaugen.

Global energy investment is expected to fall by about 20%, or $400 billion, this year because of the coronavirus outbreak, the International Energy Agency (IEA) said on Wednesday.

(GRAPHIC: Weekly changes in petroleum stocks in the U.S. - https://fingfx.thomsonreuters.com/
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(Reporting by Bozorgmehr Sharafedin in London; Additional reporting by Aaron Sheldrick in Tokyo; Editing by David Goodman and David Evans)

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