(Bloomberg) -- Oil plunged almost 8% for the steepest one-day drop in more than four years after U.S. President Donald Trump escalated the trade war with China with a new tariff threat, heightening concerns about an economic slowdown that would be a drag on energy demand.
Futures closed down 7.9% in New York on Thursday. In a tweet bemoaning the lack of progress in trade talks, Trump said 10% levies will be imposed Sept. 1 on $300 billion in Chinese goods. The threat compounded fears about slumping American manufacturing activity after the Federal Reserve dashed prospects for serial interest-rate cuts to juice growth.
“All of the markets are reacting to what the president said,” said Bart Melek, head of global commodity strategy at TD Securities. “Anything that requires an appetite for risk got smoked and that includes oil.”
Oil last month capped its smallest monthly move since 1991 as it was caught between fears that demand may slow and concerns crude flows from the Middle East may be disrupted. The slow pace of U.S.-China trade negotiations helped fuel concerns about the global economy.
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“These are the two largest economies in the world so you put them together and it’s a big deal,” said Kyle Cooper, director of research at IAF Advisors. “Increased tariffs lead to concerns about a slow down in the global economy and on demand. Crude is taking the news of the tariffs on the chin.”
West Texas Intermediate for September delivery fell $4.63 to settle at $53.95 a barrel on the New York Mercantile Exchange, the largest decline since February 2015. The drop clipped crude’s year-to-date advance at 19%.
Brent crude for October settlement sank $4.55 to settle at $60.50 on the ICE Futures Europe exchange. The global benchmark crude traded at a $6.49 premium to WTI for the same month
Trump’s tweet was preceded by talks in Shanghai that ended with little in the way of consensus between the two countries. The next round of talks will not take place until next month.
The new tariffs will target Chinese imports that have not yet been subject to U.S. levies, Trump said. At least $250 billion worth of Chinese goods are already subject to a 25% U.S. tariff.
Before Trump’s tweet, crude already was weakening because of a slump in American manufacturing activity. Meanwhile, U.S. Federal Reserve Chairman Jerome Powell’s comments that the Fed’s first rate cut in a decade isn’t the start of an extended cycle of monetary-policy easing also added to the dip.
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