Oil Sinks After One-Two Punch from China, Powell

23/08/2019 17:03:48 Commodities

By Barani Krishnan

Investing.com – It was bad enough that Fed Chair Jay Powell decided not to give investors a clue on where he thought interest rates were headed.

China and President Donald Trump had to make it a one-two punch for oil and other markets on Friday. China announced a new 10% tariff on $75 billion of U.S. products, including crude, and President Trump got mad and announced he was ordering U.S. companies to move their manufacturing facilities somewhere else.

New York-traded West Texas Intermediate crude was down $1.88, or 3.4%, at $53.47 per barrel by 1:13 PM ET (17:55 GMT), reacting to the lack of clarity by the Federal Reserve on monetary policy as well as Beijing’s latest salvo in its tit-for-tat tariffs war with Washington.

London-traded Brent crude, the benchmark for oil outside of the U.S., fell $1.30, or 2.2%, to $58.52, staying below the key $60 per barrel level.

Friday’s tumble was the sharpest one-day drop for both WTI and Brent since Aug. 7. For the week, the U.S. crude benchmark was headed for a loss of 2.7%, while Brent was almost flat. It came as stocks plunged in response to the president's China pronouncement.

If the losses hold, WTI could end the week down 2.4%, with Brent down slightly.

Barring Friday’s move, oil prices could spend an extended time boxed in sideways trading, with the occasional spike up or down, due to the countervailing forces of the trade war and supply outages.

“Oil prices have entered the rocky ranges, trapped in a world of wild moves but still getting nowhere, as it appears lost in a range somewhere,” said Phil Flynn.

“Of course, the moves are compelling because whatever way we break out of this range could mean a major move. We think it will be to the upside, but technically it could be a big move to the downside.”

The U.S. economy is in a "favorable place" and the Fed will "act as appropriate" to keep the current economic expansion on track, Powell said on Friday in remarks that gave few clues about whether the central bank will cut interest rates at its next meeting or not.

Rate cuts weaken the U.S. dollar, making commodities priced in the greenback cheaper for the rest of the world. Dollar-denominated prices of raw materials such as oil often automatically rise after a rate cut, adjusting to the phenomenon.

The Fed cut rates last month for the first time in a decade, dropping 25-basis points. Markets are expecting the central bank to do a similar reduction in September, but Powell has so far given little signs it would comply. The Fed chair has faced relentless criticism and pressure from President Donald Trump who accuses Powell’s slow action in cutting rates as the real reason for the slower-than-desired growth of the U.S. economy.

China was, meanwhile, retaliating against U.S. plans to levy an additional 10% tax on $300 billion worth of Chinese goods, including consumer electronics, through two stages of tariffs scheduled to go into effect on Sept. 1 and Dec. 15.

"China's decision to implement additional tariffs was forced by the U.S.'s unilateralism and protectionism," China's Commerce Ministry said in a statement, adding that its retaliatory tariffs would also take effect in two stages on Sept. 1 and Dec. 15.

Hours later, the president ordered companies in the United States to stop doing business with China and warned of additional retaliation.