Bank of America Merrill Lynch issued a warning this week of a possible worst-case scenario involving China's purchase of Iranian crude oil in retaliation to the Trump administration's recent tariff threats.
The Wall Street bank warned that oil prices could drop to as low as $20 or $30 per barrel if China does decide to purchase oil from Iran.
The bank issued the warning as part of its oil price forecasts. The bank's BofA Merrill Lynch Global Research report revealed that the firm still predicts Brent prices to stay at around $60 up until next year.
However, the report claims that if China does decide to reinitiate its crude purchases from Iran, oil prices could drop by as much as $20 to $30 following the move.
China hasn't explicitly threatened to reinitiate its Iran crude purchases, but the country has promised to enact countermeasures in light of the US' recent actions.
The Chinese Ministry of Commerce announced this week that it will be taking appropriate action in response to the US' decision to slap an additional 10 percent tariff on $300 billion worth of Chinese goods.
China has so far announced that it has canceled major orders for US agricultural products with plans to shift to other global suppliers. The country also recently devalued its currency, sending global markets on a downward plunge.
The tit-for-tat moves between two of the world's largest economies have also sent global oil markets plunging. Global oil markets had dropped by almost 8 percent, the biggest drop in over four years.
Analysts have stated that the volatility of the oil markets is now at an all-time high as most are waiting for China's next course of action. A move to purchase oil from Iran is a highly probably strategy for the country as it would cushion the negative effects of the rising US tariffs. However, the decision would essentially undermine the US' foreign policy, further exacerbating the already fragile tensions between both nations.
Political and economic experts believe that China's purchase of Iranian oil could be a double-edged sword. Iran will undoubtedly welcome China decision as it would significantly increase its production in light of the US' sanctions against its oil exports.
However, the move could force other oil-producing nations such as Saudi and Iraq to discount their products to steal China's business and curb Iran's market share. Another major concern that has been raised is that Iran continues to be an uncontrolled factor in the equation, and China's partnership with the nation could further alienate it from western economies.
