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The Cost of Chaos, Part 2: Oil Price & Trade War Uncertainty Continues

As we discussed in the first part of this blog series, one of the best ways to create long-term response plans to volatility is to stay informed. “Ongoing volatility” is a great way to summarize the changes in oil pricing and the status of the U.S.-China trade war. Uncertainty surrounding market and political events can mean additional time and resources devoted to weathering the “storm,” so we’re keeping track of them to the best of our abilities, and relaying what we’ve learned.

Read on to discover the latest developments in the oil market and trade war.

Oil Price Developments

Oil prices rapidly fell throughout the first months of 2019, but is on the rise once again as of the first week of April. While October 2018 saw oil prices of over $84 per barrel, in February 2019 they plummeted to around $55. However, prices have been on a surging uptick (at faster rates than predicted), and as of April 4th Brent oil prices exceeded $70 per barrel for the first time in nearly 5 months.

What’s Causing the Oil Price Increase?

A single surge isn’t proof of a trend. However, analysts cite the tight global supply as a probable cause for the price increase. Part of this may be due to OPEC’s plan to cut oil production and supply by 1.2 billion barrels of crude oil per day in April.

This limit on production is a carefully organized counter-balance to the recent months’ drops in oil prices. By restricting the supply, OPEC hopes that the price will correct itself. The measure also aims to help restore the economies of OPEC countries that depend on oil exports.

According to President Trump (stated on Twitter in February), “Oil prices are getting too high. OPEC, please relax and take it easy. World cannot take a price hike — fragile!” However, the Saudi Energy Minister Khalid al-Falih returned that the OPEC is indeed taking it easy, and emphasized that overall pricing stability is the highest priority. Price stabilization is essential for reliable supply chains. When manufacturers and distributers can predict upcoming costs, they can more accurately budget for their own processes.

U.S.–China Trade War Developments

Economic turbulence and pricing competition aren’t the only forces hitting markets. With the ongoing talks between China’s President Xi Jinping and President Trump, both domestic and international markets have been waiting to hear about the future regarding:

  • Oil markets
  • Intellectual property rights
  • Tariffs on Chinese-manufactured goods
  • Stability for domestically produced parts and equipment

Recently imposed tariffs have hurt affected industries, particularly manufacturing. These tariffs are currently at 10%, and the planned raise to 25% is currently on hold in a temporary 90-day agreement. A point of continuous debate is that China would like to remove all tariffs involved, while Trump insists that some tariffs remain for the U.S. to have leverage over China until all resulting agreements are fulfilled.

Is an End to Trade Tensions in Sight?

China and the United States have been negotiating several of the items listed above to reach compromises without imposing further tariffs or intensifying the trade war. According to President Trump, there has been “substantial progress” in reaching a deal. The progress may be enough to do away with the previously planned tariff increases from 10% to 25%.

However, if these increases are indeed imposed on the 5,700+ products outlined by the Trump administration in June 2018, the resulting pricing instability will undeniably hurt industries on both sides of the Pacific. Manufacturers that rely on rubber and polymers in particular, such as the automotive and medical technology fields, will especially feel the fluctuations within the supply chain.

Current progress in the China-U.S. negotiations has so far delayed new instability. As of April 4th, Trump has relayed that trade talks are going well, and that both sides of the table plan to continue talks and sign a final trade agreement soon. UP&R will be closely tracking this progress to provide updates on potential impacts and pricing considerations throughout the upcoming weeks.

High Quality Products During Turbulent Market Conditions

Maintaining a secure supply chain is absolutely crucial to every industry, including those of us – including UP&R – that rely on oil compounds and rubber. Although international markets may be in a state of flux, you can trust that UP&R will remain consistent in delivering the highest-quality products every time. Our rubber and plastic extrusions, rubber moldings, and die-cut parts will continue to be available at reasonable price points.

We have over 50 years of rubber and plastic extrusion experience, with specialties across many industries. Although political tension, oil market fluctuations, and international trade uncertainties may create worrisome headlines, you can always rely on Universal Polymer & Rubber. Contact us today to learn more about our capabilities and services.

The Cost of Chaos: Economic Challenges Going Into 2019

The start of 2019 carries with it several uncertainties from 2018: for example, the instability of the global supply chain caused by the United States’ trade war with China, and volatile oil prices brought about partly by ongoing situations within Venezuela and the Middle East. Despite efforts by the federal government to alleviate some of the negative effects of these events, many small and medium-sized businesses must continue seeking new ways to adapt to an unstable global market.

Here we outline these causes of uncertainty and how they impact businesses like UP&R:

Volatile Oil Prices

Oil prices have fluctuated dramatically over the last 12 months, disrupting supply chains for manufacturers that rely on this resource. For example, between mid-September and late November 2018, oil prices dropped from approximately $74 per gallon to just $50 per gallon in a span of six weeks. This creates a frustrating situation for oil consumers, who in turn have a more difficult job ascertaining when to purchase oil and how much of it.

Forbes recently described two key factors that may have caused this latest drop in oil prices:

Uncertainty in Future Price Outlook 

Oil traders base their pricing as much on their perceptions of the oil market’s direction as they do on the oil’s value itself. If traders expect an increase in oil supply, they quickly lower their prices to undercut their competitors. Similarly, if oil traders have reason to believe demand will rise or oil supply will fall, they raise their prices accordingly.

In late 2018, a boom of American shale oil production coincided with an increase in Arabian drilling to counteract an unexpected thaw in sanctions imposed on Iran. This created fears of an oil supply glut, as American, Arabian, and Russian companies stepped up production to prevent their market share from going to Iranian producers. While quick decisions like these are impossible to fully predict, it’s important to monitor the political situation surrounding the oil trade (as well as other commodities markets that make up a particular supply chain) to best anticipate when to procure.

Slow-Changing Supply and Demand

Other markets can balance out changes in supply and demand fairly quickly. For example, the cotton industry can easily account for changes in demand because it’s based on an organic substance that’s relatively quick to produce. If cotton’s in high demand, farmers can simply plant more of it and expect to see the positive effects within the upcoming seasons.

The same cannot be said for oil suppliers. Oil is a more finite resource, and it can take over 10 years to develop new wells. Only very large price changes can rebalance the supply and demand for oil. For this reason, it’s harder for the supply of oil to adapt to changes in the market, which ironically makes its pricing more volatile. If oil traders anticipate that they may need to sit on vast stocks of oil while demand is low, they’ll price it more cheaply to move as much of it as possible. For this reason, it’s also important to monitor changes in the oil market so that you can buy oil when nobody else is.

How This Affects Us

Because UP&R products consist mainly of oil-based compounds, we’ve had to shake up our strategies to account for worldwide fluctuations. We take extra care to monitor the latest fluctuations in the oil market. Oil prices directly impact our ability to provide cost-efficient rubber products. Therefore, recent volatility in the oil market means that small- and medium-sized businesses have to devote more resources – one notably being the amount of time invested – to monitoring developing situations instead of focusing on their products and branding.

The Trade War With China

In early June, the Trump Administration imposed tariffs on over 5,700 products that the United States regularly imports from China. Although intended to bolster United States production, these tariffs perplexed American manufacturers who rely on Chinese-made parts. This latest round of tariffs particularly affected UP&R because Chinese manufacturers create many of the rubber and polymer components that we turn into finished products. UP&R is diligently working to protect its margins in a this time of trade war uncertainties.

Although the long-term effects of the trade war are yet to be seen, in the short term, many small- and medium-sized businesses have had to raise prices in response to price changes in their supply chain. While most of these price changes don’t affect consumer-oriented products, they have driven up costs particularly in the automotive and medical manufacturing fields. These industries rely heavily on rubber- and plastic-based products to build gaskets, seals, brake pads, and tires (for automotive applications) and extruded plastic tubing and device housings (for medical equipment). UP&R also has been forced to raise its prices as this industry operates on rzor thin margins, and any increased must be calculated into the selling price.

Quality Rubber Solutions at UP&R

Despite an uncertain trade climate and the roller coaster ride of determining when to buy oil, we at UP&R seek to provide the same high-caliber products and services that our customers have come to expect. We’re confident that we can weather this storm of economic factors without affecting our clients’ bottom line.

If you would like to learn more about our work or quality rubber and polymer solutions, contact us today.