Oil Reverses Drop Following China Yuan Fix

Oil Reverses Drop Following China Yuan Fix
Oil reversed a decline as China's central bank set the yuan fixing stronger than expected.

(Bloomberg) -- Oil reversed a decline as China’s central bank set the yuan fixing stronger than expected, calming investors after the U.S. escalated the trade war by labeling the Asian nation a currency manipulator.

Futures in New York rose as much as 1.3% after being down as much as 1.8% earlier. China’s currency fixing was weaker than 7 per dollar, suggesting officials want to slow the pace of declines in the yuan. The U.S. Treasury Department made the manipulator determination Monday after Beijing allowed the yuan to weaken to the lowest level in more than a decade.

While the yuan fix provided some relief to investors, the world’s two largest economies are still locked in a tit-for-tat spiral with no end in sight. That’s pushed oil down about 6% this month and eclipsed the threat of supply disruptions from the Middle East. Iran could step up its operations against tankers passing through the Strait of Hormuz, the world’s most important oil chokepoint, Foreign Minister Javad Zarif said on Monday.

While crude prices got a boost from the yuan fix, “the upside is limited,” said Takayuki Homma, chief economist at Sumitomo Corporation Global Research Co. in Tokyo. Concerns over falling demand will continue to weigh on prices due to the U.S.-China tensions, he said.

West Texas Intermediate oil for September delivery rose 58 cents, or 1.1%, to $55.27 a barrel on the New York Mercantile Exchange as of 7:30 a.m. in London. The contract fell 1.7% on Monday.

Brent for October settlement climbed 61 cents, or 1%, to $60.42 a barrel on the London-based ICE Futures Europe Exchange. It slumped 3.4% on Monday to the lowest level since mid-January. The contract traded at a premium of $5.26 to WTI for the same month.

While the U.S. Treasury Department’s determination is largely symbolic, as the potential punishments are a shadow of the steps President Trump has already taken against China, it underscores the rapidly deteriorating relationship between the world’s two largest economies. A gauge of Asian stocks fell for a fifth day on Tuesday to the lowest level since early January.

Beijing will likely retaliate with levies on American oil imports if the White House goes ahead with putting tariffs on all Chinese goods, Michal Meidan, director of the China Energy Programme at the Oxford Institute for Energy Studies wrote in a note. If China decides to defy U.S. sanctions and start buying Iranian crude, oil prices could fall by $15 to $20 a barrel “in a heart beat,” Stephen Innes, managing partner at VM Markets, said in a note.

“The U.S.-China trade war is worsening in every conceivable way,” said Satoru Yoshida, a commodities analyst at Rakuten Securities Inc. in Tokyo. “Even if tensions ease in one area such as tariffs, sanctions on companies or currencies, they may find another point of conflict.”

To contact the reporter on this story:
Tsuyoshi Inajima in Tokyo at tinajima@bloomberg.net

To contact the editors responsible for this story:
Serene Cheong at scheong20@bloomberg.net
Andrew Janes, Ben Sharples


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