Oil: Tariff tensions build - ING

Oil prices witnessed something of a relief rally this morning. Yet risks are still skewed to the downside as President Trump threatens an additional 50% tariff on Chinese goods if it doesn't lift its 34% retaliatory tariff today. It's unlikely that China will reverse the policy. As such, markets are likely to see further escalation, which will only exacerbate growth concerns and worries over oil demand, ING's commodity analysts Warren Patterson and Ewa Manthey note.

OPEC+ can pause or even reverse supply increases

"As we mentioned following the move by OPEC+ to increase supply, we expect a strengthening in the Brent-Dubai spread, something we've seen in recent days. A combination of stronger OPEC+ supply and tariff impacts (with a number of Asian countries receiving higher-than-feared reciprocal tariffs), should cause the spread to strengthen further."

"The broader move lower we've seen in crude oil since 2 April suggests the market is pricing in bigger odds of a recession. The scale of the sell-off will worry OPEC+, which last week surprised the market with a larger-than-expected supply hike for May. If downward pressure continues, the OPEC+ move could be very short-lived. We could see OPEC+ pause or even reverse supply increases. The Saudis need around US$90/bbl to balance their budget. While their supply increase last week suggests they're not aiming for this level, the Saudis probably don't want to see an even wider gap between their fiscal breakeven level and current prices."

"Slowing in US drilling activity could offer some soft support for the market. We expect current WTI prices to lead to a pullback in drilling. This will eventually feed through to slower supply growth and potentially even a decline in US oil output. High decline rates for US shale mean consistent drilling is needed to keep US output stable. According to the latest Dallas Federal Reserve Energy survey, producers need an average of $65/bbl to profitably drill a new well."