- US/Chinese tensions remain high as China seems to threaten purchases of U.S. ag products
- Russia reportedly wants to dial back OPEC+ production cut
US/Chinese tensions remain high as China seems to threaten purchases of U.S. ag products — China seemed to fire a shot across President Trump’s bow on Monday regarding its purchase of U.S. ag products, which are important for Mr. Trump’s reelection effort.
Bloomberg on Monday reported that the Chinese government instructed state-owned ag companies to pause their purchase of U.S. agriculture products. Specifically, Bloomberg said that state-owned traders Cofco and Sinograin were ordered to suspend purchases of ag goods, including U.S. soybeans, and cancel purchases of U.S. pork. The article said that the government has not prevented private Chinese companies from buying U.S. ag products.
Chinese officials seemed to plant the Bloomberg story as a warning to President Trump that China can inflict some pain if he clamps down too hard on Hong Kong. President Trump last Friday said the U.S. would withdraw its preferential treatment of Hong Kong, although he did not give any timeline or name the specific provisions that would be withdrawn. Mr. Trump also did not announce sanctions on any specific Chinese or Hong Kong officials.
The Hang Seng index on Monday closed sharply higher by +3.36% on relief that Mr. Trump last Friday announced only vague threats on Hong Kong and did not cancel the phase-one trade deal, did not sanction Chinese officials, and did not impose sanctions that might impinge on Hong Kong’s banking and financial industries. However, Hong Kong stocks on Tuesday may be a bit less optimistic after Bloomberg’s report that China may be implicitly threatening to cancel the phase-one trade deal.
The Chinese yuan on Monday rose by +0.12%, adding to the +0.43% rally seen last Thursday/Friday and recovering farther from last Wednesday’s 9-month low. The modest recovery in the yuan in the past several sessions is a positive factor for Chinese stocks since it reduces the threat of capital flight.
The US/China phase-one trade deal is already on thin ice because China has not come close to meeting its purchase requirements. China agreed to purchase an extra $200 billion of U.S. goods during 2020-21. However, China in Q1 bought only $3.35 billion of U.S. ag products, according to Bloomberg, which is only 9% of its promise to buy $36.5 billion of U.S. ag products in 2020. China’s purchases of U.S. products are lagging in all other sectors including energy.
China can hardly be blamed for buying so few U.S. products in Q1 since its economy was running at only about 50% of capacity for part of the quarter. Nevertheless, President Trump needs some actual results to show for his phase-one trade deal, which came at the expense of billions of dollars of tariffs on U.S. companies, most of which are still in place.
The phase-one trade agreement has a provision that allows it to be canceled by either party at any time. The agreement also has a provision that allows for renegotiation if there are extraordinary and unforeseen events beyond the control of the parties, which is clearly the case with the global pandemic.
If the phase-one trade deal falls apart, there is little doubt that Mr. Trump would reimpose the tariffs that he reduced as part of the deal and impose new tariffs. The stock market would undoubtedly fall sharply on any new tariffs, which would deepen the current U.S. recession that is already the worst in post-war history. The U.S. and China would likely have difficulty reaching any new trade deal before the November election, meaning that US/Chinese tensions would remain high at least into early 2021.
Russia reportedly wants to dial back OPEC+ production cut — Some OPEC+ members are pushing to bring forward the OPEC+ meeting to this week from next week, and extend the current 9.7 million bpd production cut past June. However, Russia reportedly wants to proceed with the original plan, which is for the OPEC+ production cut to be trimmed to 7.7 million bpd during July-Dec 2020. Russian oil companies are reportedly reluctant to maintain the current cuts and want to partially revive their production.
July WTI crude oil prices on Monday rallied to a new 2-3/4 month high of $35.90, which brought the overall rally to a total of +108% from the late-April contract low of $17.27. Oil prices have rallied sharply due to (1) the OPEC+ production cut, and (2) sharp production cuts by private oil companies that were losing money on pumping oil and that had no storage available for excess oil.
U.S. oil producers acted very quickly and have so far cut U.S. oil production by a total of 1.7 mln bpd (-13%) to a 10-month low of 11.4 mln bpd from March’s record high (13.1 mln bpd). U.S. oil companies have been aggressively closing unprofitable wells. The number of active U.S. oil rigs has plunged by -67% to an 11-year low of 222 rigs from 678 rigs as recently as February, according to Baker Hughes.
Oil prices have rallied sharply in recent weeks as the speed of global oil production cuts surprised traders and reduced the risk that global oil facilities might become filled to the brim. However, the oil rally may not have much farther to go as Russia wants to trim the production cuts and as some private wells start to reopen with oil prices recovering to the $35 per barrel area. More importantly, the global oil market faces the challenge of working off a massive over-supply of oil. OECD crude oil inventories soared to a record high of 3.35 billion bbls in April, up by +413 million bbl (+14%) just since February. OECD inventories are now 15% above OPEC’s target of the 5-year average level of inventories.
