Oil prices drop as US-China tensions rise

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Oil fell on Monday on worries about renewed tensions between the US and China, although reports that OPEC and Russia were closer to a deal on extending oil output cuts lent some support to prices.

Benchmark Brent crude was down 46 cents, or 1.2 percent, at $37.38 a barrel at 1331 GMT. US crude fell $1.04, or 2.9 percent, to $34.45 a barrel.

Investors turned cautious after China warned of retaliation on US moves over Hong Kong.

Beijing has asked its state-owned firms to halt purchases of soybeans and pork from the US, two sources said. China could expand the order to include additional US farm goods if Washington took further action, sources said.

“The possibility of heightened tensions does pose a risk for the recent rally in oil prices,” said Harry Tchilinguirian, head of commodity research at BNP Paribas.

US President Donald Trump’s directive to begin the process of eliminating special treatment for Hong Kong is likely to create a new driver of volatility in global markets as tensions between Washington and Beijing climb again.

Manufacturing data has also showed that Asian and European factories were struggling as lockdowns due to the coronavirus pandemic kept demand in check.

Prices found some support, however, after a news that the Organization of the Petroleum Exporting Countries and Russia, part of a group known as OPEC+, were moving closer to a compromise on the duration for extending oil output cuts and were discussing rolling over the curbs one to two months.

“The fact that crude ... prices have not reacted much to the news of the potential cut extension can be seen as a sign that the market has already priced in a lot of optimism,” JBC Energy analysts said in a note.

Algeria, which holds the rotating OPEC presidency, has proposed that OPEC+ hold a meeting on June 4 rather than the previously planned June 9-10. Russia has said it has no objection to meeting sooner.

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