Soon after U.S President Donald Trump said he was working on a strong response to China’s proposed security law in Hong Kong, oil prices took a drastic downturn on Wednesday.
Brent crude fell 47 cents, or 1.3%, to $35.70 a barrel by 1106 GMT and U.S. West Texas Intermediate (WTI) crude was down 32 cents, or almost 1%, at $34.03.
“As much as oil fundamentals are improving, there are still several flies in the bullish ointment. They include the latest uptick in U.S.-China tensions,” said Stephen Brennock of oil broker PVM.
“The threat of a fresh U.S.-China trade war is no longer just a tail risk and could spell disaster for risk assets,” he added.
Gloomy forecasts over the economic impact of the pandemic also weighed on crude prices.
The euro zone economy is likely to shrink between 8% and 12% this year, European Central Bank President Christine Lagarde said, warning that a mild scenario was already outdated and the outcome would be between medium and severe.
Traders were also paying attention to early signals on a meeting between the Organization of the Petroleum Exporting Countries and its allies in less than two weeks.
The Organization of the Petroleum Exporting Countries and producers including Russia, a grouping referred to as OPEC+, are cutting their output by nearly 10 million barrels per day in May-June to buttress prices as measures to rein in the coronavirus pandemic have slashed fuel demand.
In the US, where some states are opening up after lockdowns, optimism about an increase in demand has supported sentiment, but the recovery is fragile, analysts caution.
“Stock builds are falling and the market will be balanced in June, so who wants to willingly forego millions of crude barrels in sales if he’s able to sell it in a recovering market,” said Rystad Energy’s head of oil markets, Bjornar Tonhaugen.
Global energy investment is expected to fall by about 20%, or $400 billion, this year because of the coronavirus outbreak, the International Energy Agency (IEA) said on Wednesday.