Oil falls on trade war worries, but tight market supports

Chinese diplomat ramps up rhetoric by comparing actions from the US to economic terrorism

SINGAPORE/LONDON: Oil prices fell on Thursday on fears of a global economic slowdown due to a US-China trade war but losses were capped by a tightening crude market and rising political tensions in the Middle East.

Brent crude futures, the international benchmark for oil prices, were at $68.86 per barrel at 1044 GMT, down $0.59, or 0.9%, from their last close.

US West Texas Intermediate (WTI) crude futures were up $0.12, or 0.2%, at $58.93 a barrel, supported by expectations of a fall in US crude inventories.

"An escalating US-China trade war represents a risk to oil markets," Bernstein Energy said in a note on Thursday.

A senior Chinese diplomat ramped up the rhetoric against the United States on Thursday by comparing actions from Washington to "naked economic terrorism".

Bernstein said that under "a full-blown trade war scenario" global oil demand would grow by 0.7% this year versus 2018, only half of current estimates.

Because of weakening demand, Bernstein said any upside for oil markets was capped despite relatively tight supply.

Oil prices have been supported in recent months by output cuts from the Organisation of the Petroleum Exporting Countries (OPEC) and other major producers as well as falling supplies from Iran.

Iranian May crude exports dropped to less than half of April levels at around 400,000 barrels per day (bpd) after the United States tightened sanctions on Tehran's main source of income. Iran needs to export at least 1.5-2.0 million bpd of crude to balance its books.

"We see an abundance of escalation risks in large part because the US sanctions are subjecting Iran to almost unprecedented economic pain," said Helima Croft from RBC Capital Markets.

Arab leaders gather in Saudi Arabia on Thursday for emergency summits that Riyadh hopes will deliver a strong message to Iran that regional powers will defend their interests against any threat following attacks on Gulf oil assets this month.

Many analysts also expect the OPEC-led supply cuts to be extended until the end of 2019 as the group wants to prevent oil prices falling back to levels seen in late 2018 when Brent slumped to $50 per barrel.

Since OPEC and its allies started withholding supply in January, oil prices have risen by about 30%.