U.S.-China Trade Battle Is Crimping Global Oil Demand

Worries about the health of the economy and increasingly uncertain trade relations between the U.S. and China will put further pressure on global oil demand in 2019, the International Energy Agency said Friday.

In its closely watched oil-market report, the IEA downgraded its forecast for global oil-demand growth for the third time in four months, lowering it to 1.1 million barrels a day from 1.2 million barrels a day. Demand for the January-to-May period was at its weakest since 2008.

While geopolitical tensions remain elevated in the Middle East between Western and Iranian naval forces, the IEA’s main focus was the economy.

The agency has expressed growing alarm over the impact of the trade battle between the U.S. and China on both economic and “very sluggish” global oil demand growth, having cut its forecast in May and June.

“Now, the situation is becoming even more uncertain: The U.S.-China trade dispute remains unresolved and in September new tariffs are due to be imposed,” the report said.

Despite worries about softening consumption leading to a supply glut, U.S. crude rose 3.7% to $54.50 a barrel on the New York Mercantile Exchange Friday to cap off a rocky week of trading. Brent crude, the global price gauge, added 2% to $58.53 a barrel on London’s Intercontinental Exchange.

West Texas Intermediate futures, the U.S. price benchmark, are still down 7% for the month as analysts weigh ongoing uncertainty about trade.

Brent crude oil, the global benchmark, was up 1.5% at $58.26 a barrel and U.S. crude was 1.5% higher at $53.31 a barrel. Both remain sharply down this month, though, having faced heavy selling amid escalating trade tensions. Brent has dropped more than 10% in August, while U.S. crude is down 9%.

Worsening relations between the U.S. and China “could lead to reduced trade activity and less oil demand growth,” the report said.

In making its decision, the IEA said it considered the International Monetary Fund’s downgrade to its global-growth outlook. The IMF recently cut its forecast for global GDP growth in 2019 by 0.1 percentage point to 3.2%.

The agency isn’t the first major body to lower its expectations this month. The U.S. Energy Information Administration said earlier this week it was reducing its forecast for 2019 world-wide oil consumption for a seventh straight month.

The Organization for the Petroleum Exporting Countries’s monthly market report, due out next week, will be closely examined for signals that the cartel wants to either more strictly enforce the production cut it agreed to extend with allies in early July, or to cut more deeply.

Some analysts have suggested OPEC has become complacent in enforcing cuts, allowing numerous oil-exporting countries—usually ones facing geopolitical upheaval and economic woes—de facto exemptions from fulfilling their agreement to cut output.

President Trump addressed reporters at the White House and said the U.S. and China are still pursuing a trade agreement, but he is not ready to make a deal. Photo: ZUMA Wire

OPEC production figures were slightly down in July. The organization’s output was down 2 million barrels from the same month last year—also because of lower output from Venezuela and Iran—and production dropped by 190,000 barrels a day from June levels. Saudi Arabia was again the largest cutter, lowering production by 120,000 barrels a day, while half of that was offset by a 60,000-barrel-a-day increase from Iraq.

Iranian production, meanwhile, fell 50,000 barrels a day to 2.23 million barrels a day in July, its lowest since the late 1980s, amid U.S. attempts to cut exports to zero through sanctions.

That said, “it is widely reported that significant volumes are moving under-the-radar,” and tanker storage is close to an all-time high, the IEA noted.

The U.S.’s emergence as an energy exporter has concerned OPEC in recent months, with a burgeoning supply glut out of non-OPEC countries threatening to overwhelm markets.

OPEC’s cut in July slightly outweighed a 160,000-barrel-a-day rise in non-OPEC production in July, with the IEA citing rebounds in North Sea and Brazilian production as offsetting a fall in U.S. output. Hurricane Barry at one point shut down around 70% of production in the Gulf of Mexico.

Write to David Hodari at David.Hodari@dowjones.com

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