This is the kind of claim that you would expect the world’s largest exporter, Saudi Arabia, to make. On Saturday, Saudi oil and energy minister Khalid al-Falih said that he saw no oil supply shortage since global oil inventories are rising, particularly from the U.S. However, he added that OPEC would remain responsive to the oil market’s needs.

He made his comments ahead on a ministerial panel that was scheduled to meet on Sunday between OPEC and non-OPEC producers. Falih added that OPEC will not decide on its oil output plan until the cartel meets in June. The OPEC+ group of producers, that includes both OPEC and non-OPEC members, predominantly non-OPEC producer Russia and Saudi Arabia, the world’s largest oil exporter, agreed late last year to withhold 1.2 million barrels per day (bpd) of oil from global markets starting January 1 for six months (with a review period in June) to both reduce global inventories and put pressure under prices which had fallen markedly at the end of last year. So far the plan has worked since global oil prices have trended upward more than 30% since the start of the year.

However, much of that price increase can also be attributed to geopolitical factors, including U.S. sanctions on Iran and Venezuela (both OPEC members) as well as production problems in Libya as opposing forces engage in fighting near Tripoli. Moreover, Libya’s National Oil Corporation (NOC) chief said on Saturday continued instability in Libya could make it lose 95% of its oil production. Libya is also an OPEC member. Attacks last week on oil tankers near the UAE carrying Saudi crude as well as drone attacks on two oil pumping stations within Saudi Arabia also supported prices.

Falih is correct, in part, since U.S. production has thus far served as a counter weight to loss of barrels from Iran, Venezuela and Libya as well as the OPEC+ oil output cut. A few weeks ago, U.S. oil production hit a new record, a whopping 12.3 million bpd. However, what Falih did not mention are considerable risks to global oil demand, particularly from increased trade tensions between Washington and Beijing. The U.S. just increased tariffs on some $200 bn worth of Chinese goods from 10% to an economically damaging 25%, with another $300 bn in Chinese goods likely to also be hit with fresh duties. China has retaliated by increasing duties on $60 bn worth of U.S. goods from 10% to 25%, including American liquefied natural gas (LNG) imports, which will negatively impact new U.S. LNG project proposals that need Chinese financing and long term supply deals with Chinese firms to go forward.

Moreover, last week the Paris-based Energy Information Agency (IEA) cuts it forecast for global oil demand, stating that demand will grow more slowly than previously thought following an economic lull in Asia. Disappointing fuel consumption in China, Japan and Brazil meant 2019 started with a “tough quarter,” the IEA said. The agency lowered its global demand estimate for the first time since October. As a result, world oil inventories surprisingly swelled during the first three months of the year. However, that’s only part of the story. The IEA added that global oil stockpiles are set to plunge sharply this quarter as demand picks up and as sanctions squeeze Iranian oil production and exports.

Going forward, however, the impact of increased tariffs on both Chinese and U.S. goods will take several months before it hits both global economic growth and overall oil demand - it’s the swing factor in the global oil markets equation that could send prices south, even to price points not seen since the last down turn in oil markets in 2015 and 2016 when prices dipped below $30 per barrel, ushering in one of the worst oil market crashes in a scenario that saw Saudi Arabia run record budge deficits, pass unprecedented austerity measures and borrow cash in international bond markets. It also saw an estimated 350,000 global oil industry workers displaced and unemployed.

At the end of the day, its not just oil production micro-management from the Saudis and its non-OPEC producers that could roil markets in the short to mid-term, its an impending global tailspin from a full blown trade war between the U.S. and China, the two largest economics in the world. 

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