Oil is dragged into the trade war between the United States and China and prices collapse

By Devika Krishna Kumar

NEW YORK (Reuters) – China has threatened to impose tariffs on US crude oil for the first time in the escalation of the bilateral trade war.

China said crude would be among US products subject to tariffs of 5% as of 1 September. US President Donald Trump said he would propose an answer later on Friday.

A trade dispute between the world 's two largest economies has dragged on for more than a year and has shaken financial markets. Although Chinese and US trade negotiators have had talks as recently as this week, neither side seems ready to make a major compromise and there has been no sign of a short-term truce.

China, one of the world's largest crude importers, has sharply reduced shipments to the United States from last year's record. With the latest rates, purchases will probably stop completely, traders and analysts said.

The shale boom allowed the United States to become the world's largest oil producer, ahead of Saudi Arabia and Russia, and exports surpassed the record of more than 3 million barrels a day after the lifting of the ban, end of 2015.

"The oil market is officially caught between two fires in the tit-for-tat trade war, this time with China hitting the heart of Trump's traditional base of support for US oil producers," said Michael Tran, director of the energy strategy at RBC Capital Markets in New York.

"China being the first region in the world in terms of growth in crude imports, US producers need China, not the other way around," he said. "The United States will have to find other buyers for their crude, which will be a challenge given the weak global demand."

US shipments to China accounted for about 5% of total US crude oil exports on average this year, according to Ministry of Energy data.

US crude futures dropped 3.5% to $ 53.40 a barrel on Friday, their lowest level since August 9th. The rise of the trade war should weigh more heavily on US crude than on the international Brent benchmark, market sources said.

(Report by Devika Krishna Kumar in New York, edited by Richard Chang)