Energy Prospectus

LONDON (Reuters) - Oil prices were steady on Monday as U.S.-China trade tensions continued to threaten demand for oil, but tight crude supply and the swift end to a trade dispute between Mexico and the United States offered support.

Front-month Brent crude futures were at $63.42 at 0850 GMT, 13 cents, or 0.21%, above Friday's close.

U.S. West Texas Intermediate (WTI) crude futures were at $54.19 per barrel, up 20 cents, or 0.37%.

A deal between the United States and Mexico to combat illegal migration from Central America late last week removed the threat of U.S. tariffs on goods imported from Mexico, buoying markets on Monday.

But analysts said there were still concerns about the health of the global economy with no signs of an end in sight to the United States' trade war with China.

Harry Tchilinguirian, global oil strategist at BNP Paribas (PA:BNPP), told the Reuters Global Oil Forum that the U.S. and China accounted for around three-quarters of annual global oil demand growth in 2018.

"If Sino-U.S. relations do not improve, the spot price of oil, in our view, will remain depressed," he said.

China's crude oil imports slipped to around 40.23 million tonnes in May, down from an all-time high of 43.73 million tonnes in April, customs data showed on Monday, due to a drop in Iranian imports caused by U.S. sanctions and refinery maintenance.

Barclays (LON:BARC) bank, in a note, said over the past week or so its economists had revised down their GDP growth outlook for the U.S., China, India and Brazil - countries which account for more than three-quarters of their oil demand growth assumptions for this year.

"The revisions imply a 300,000 barrel per day reduction in our current global oil demand outlook of 1.3 million barrels per day year-on-year for this year," the British bank said.

Crude prices were supported by comments by OPEC's biggest producer Saudi Arabia on Friday that the group was close to agreeing an extension to supply cuts. The Organization of the Petroleum Exporting Countries (OPEC) and some non-members, including Russia, known collectively as "OPEC+", have withheld supplies since the start of the year to prop up prices.

Saudi Energy Minister Khalid al-Falih said on Monday that Russia was the only oil exporter still undecided on the need to extend the output deal, as Moscow considers whether further cuts could allow the United States to take Russian market share.

From Phil Flynn this morning:

We have a trade deal with Mexico, again, after Mexico promised the Trump Administration that it would expand border programs to slow migration into the U.S. Now if we get a deal with China it will be risk-on nirvana. In fact, even the late deal with Mexico juiced up markets last night but data from China seemed to dampen the mood a bit. Reuters reported “that China's exports unexpectedly returned to growth in May despite higher U.S. tariffs, but imports fell the most in nearly three years in a further sign of weak domestic demand that could prompt Beijing to step up stimulus measures.”

Some analysts suspected Chinese exporters may have rushed out shipments to the United States to avoid the new tariffs on $300 billion of goods that President Donald Trump is threatening to impose in a rapidly escalating trade dispute. But Monday's better-than-expected export data is unlikely to ease fears that a longer and costlier U.S.-China trade war may no longer be avoidable, pushing the global economy towards recession.

The U.S.-China trade war concerns are raising fears of subpar oil demand growth. Yet are those fears being overstated, especially because we have the Fed telling us that they are lowering interest rates? The ECB is also hinting about a rate cut. The Chinese for their part are going to fight a trade war with massive stimulus spending. China's May exports rose 1.1% from a year earlier, compared with market expectations for a modest decline, customs data showed.

You also have OPEC that is telling you that they are going to continue to restrain supply from the marketplace. According to the latest report from S&P Global (NYSE:SPGI) SPGI Platts, OPEC production fell to 30.09 million b/d in May, the lowest since February 2015, before Gabon, Equatorial Guinea and Congo joined and when Qatar was still a member. Saudi Arabia’s crude output fell to 9.70 million b/d, lowest since January 2015. They also say that sanctions-hit Iran produced 2.45 million b/d, its lowest in almost 21 years. The cut was partly made up by Iraq whose production surged to an all-time high of 4.82 million b/d. Libya despite the potential for civil war, produced its most since June 2013.

Natural gas is still under pressure as summertime weather is hard to find. Below normal temperatures and above normal production is draining the market to new contract lows. Natural gas bulls need a heat wave and based on the forecast there is not one in sight.