After climbing slowly for the past week, U.S. oil futures on Wednesday took a 4% drop and analysts blamed it on growing tensions between the U.S. and China.
July West Texas Intermediate oil fell $1.54 or 4.5% and settled at $32.81 a barrel in trading on the New York Mercantile Exchange.
Front-month July Brent crude lost $1.43 or about 4% at $34.74 a barrel on ICE Futures Europe.
Some blamed the fall on reports that Russia favored easing up on supply cuts as planned in July. Market Watch reported that Moscow wants to start easing the cuts in keeping with the terms of the output curbs agreed to by the Organization of the Petroleum Exporting Countries and its allies earlier this year.
“The July target is in line with the current OPEC+ deal, which has a record-breaking combined production cut of 9.7 [million barrels per day] among participants,” said Robbie Fraser, senior commodity analyst at Schneider Electric.
“However, some in the group are likely to voice support for extending cuts beyond July—particularly if the market remains clearly oversupplied amid lackluster summer driving demand,” he said in a daily note.
Traders also kept an eye on rising tensions in Hong Kong as China looks to impose new security laws that would end the country’s autonomy, and worsening relations between the U.S. and China.
Secretary of State Mike Pompeo announced Wednesday in a tweet that he told Congress that Hong Kong is no longer autonomous from China. The announcement could pave the way for the Trump administration revoke its special treatment—it is exempt from tariffs levied on Chinese imports.
“Traders are concerned that expected recovery in [energy] demand may be delayed if U.S.—China—Hong Kong political tension grows, and hence is weighing in on prices,” Manish Raj, chief financial officer at Velandera Energy, told MarketWatch. “This timing impact is seen in [the] futures curve, whereby near months have declined while outer month contracts are holding steady.”
Weekly U.S. oil supply data will be released a day later than usual this week, due to Monday’s Memorial Day Holiday. The American Petroleum Institute will issue its data on U.S. supplies late Wednesday and the Energy Information Administration will release its figures Thursday morning.