Oil dragged into U.S.-China trade war, prices slump

By Devika Krishna Kumar

NEW YORK (Reuters) - China threatened to impose tariffs on U.S. crude oil for the first time in the escalating bilateral trade war, sending prices to two-week lows on Friday as that compounded worries about a slowdown in global oil demand.

China said crude would be among the U.S. products hit by tariffs of 5% as of Sept. 1. U.S. President Donald Trump said he would offer a response later on Friday.

A trade spat between the world's two largest economies has dragged on for over a year and roiled financial markets. Though Chinese and U.S. trade negotiators held discussions as recently as this week, neither side appears ready to make a significant compromise and there have been no signs of a near-term truce.

China, one of the world's biggest crude importers, has sharply lowered U.S. shipments from a record high hit last year. With the latest tariffs, purchases are likely to grind to a complete halt, traders and analysts said.

A shale boom has helped the United States become the world's largest oil producer, ahead of Saudi Arabia and Russia, and exports have surged to a record above 3 million barrels per day (bpd) after a ban was lifted in late 2015.

"The tit for tat trade war now has the oil market officially caught in the crossfire, this time with China striking the heart of Trump's traditional base of support of U.S. oil producers," said Michael Tran, director of energy strategy at RBC Capital Markets in New York.

"With China being the world's foremost crude import growth region, U.S. producers need China, not the other way around," he said. "The U.S. will have to find alternative buyers for their crude, which will be a challenge given the weakening global demand backdrop."

U.S. shipments to China have made up about 5% of total U.S. crude exports on average so far this year, according to data from the Department of Energy.

U.S. crude futures slumped as much as 3.5% to $53.40 a barrel on Friday, the lowest since Aug. 9. The rising trade war is likely to weigh on U.S. crude more than international benchmark Brent, market sources said.

(Reporting by Devika Krishna Kumar in New York; Editing by Richard Chang)