Men work on an oil rig at Sinopec's Shengli oil field in Dongying, Shandong province, China. Image Credit: Reuters

London: Oil slumped as escalating trade hostilities between the US and China stoked fears of slowing global growth, overshadowing forecasts for a drop in American crude inventories.

Futures in New York lost as much as 2.5 per cent after rallying 2.1 per cent since the close on Thursday following Chinese media suggestions on Wednesday that the nation could restrict rare earth exports to the US American crude inventories are forecast to have fallen last week, following two weeks of gains, according to the median estimate in a Bloomberg survey. Meanwhile, US National Security Adviser John Bolton blamed Iran for attacks on oil tankers near the Arabian Gulf this month.

The worsening trade conflict has weighed on the global growth outlook, pushing down oil and riskier assets. That’s dominating the narrative even as the physical crude market remains tight and multiple supply risks, including the tension in the Middle East, lurk in the background. Output cuts by the Organisation of Petroleum Exporting Countries and its allies expire at the end of June, with the group likely to set the course for the rest of the year at a meeting in early July.


US crude stockpiles as on May 24, a drop of 500,000 barrels

“Oil prices are under pressure amid the further escalation of the trade conflict between the US and China,” said Carsten Fritsch, an analyst at Commerzbank AG in Frankfurt.

West Texas Intermediate crude for July delivery fell $1.32, or 2.2 per cent, to $57.82 a barrel on the New York Mercantile Exchange at 10:59am in London. The contract closed 0.9 per cent higher on Tuesday.

Brent for July settlement dropped $1.40 cents, or 2 per cent, to $68.71 a barrel on London’s ICE Europe Futures after closing unchanged on Tuesday. The global benchmark crude was trading at a $10.86 per barrel premium to WTI, near the widest gap in almost a year.

The US shouldn’t underestimate China’s ability to fight the trade war, the People’s Daily, a flagship newspaper of the ruling Communist Party, said in an editorial Wednesday. The People’s Daily, along with Global Times and Shanghai Securities News, all indicated that Beijing is gearing up to use its dominance of rare earths, which are used to make electronics more efficient, in its trade battle with Washington.

US crude stockpiles are forecast to have fallen by 500,000 barrels to 476.3 million barrels in the week to May 24, according to the Bloomberg survey. The official Energy Information Administration data is due Thursday.

Security Adviser Bolton told reporters in Abu Dhabi the attackers had used naval mines almost certainly from Iran. The Trump administration was trying to be “prudent and responsible” in its response, he said.