2 May 2025
Drill, baby, drill no more, trade war ripple effects on Germany and Asia’s currencies leaving us a message?
Summary
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In summary:
Oil is spilling, US shale is stalling and Europe’s restocking.
In an aggressive move to reclaim market share and discipline partners that have been flouting production quotas, Saudi Arabia has triggered a supply surge, pushing OPEC+ to add 411,000 bpd in June alone – despite crude oil sliding to the low USD60s per barrel, far below its 90 USD/bbl fiscal breakeven. US shale is feeling the squeeze: low prices leave Permian producers dangerously close to their breakeven, forcing rig cuts and capex pullbacks. US output in 2025 is now expected to be 100,000 bbl/d lower than previous forecasts – drill, baby, drill no more. We now expect oil prices to range between 65 and 70 USD/bbl for the remainder of the year. Meanwhile, Europe is finding relief in the gas market: prices are down 25% from February highs, offering a window to refill storage that have been largely depleted over the cold winter. Nevertheless, even with current prices, the region faces an additional cost of about EUR10bn compared to 2024.
Made in China, felt in Germany: The trade war’s ripple effects.
The likely trade deflection arising from the US-China trade war could increase Chinese competition in the European market, with particular risks for Germany. Over the next three years, Germany may absorb 14% of deflected trade (overall German imports +2.5%). This influx will lead to cheaper Chinese inputs and boost German value added (VA) in final consumption by up to +0.12%, but this is outweighed by a +0.47% increase in Chinese VA in German final consumption, signaling domestic manufacturing displacement. Increased competition and changes in VA could strain vulnerable sectors and regions, exposing around 500,000 manufacturing jobs (7% of the sector), with an estimated 17,000-25,000 – or 0.2%-0.3% of total manufacturing employment – potentially at risk. The Chinese trade deflection could thus slow German economic growth by -0.26pp over three years, with ripple effects extending to key EU supply chain partners, especially in Eastern Europe.
Taiwan: A bellwether for currency plays ahead of trade negotiations?
The Taiwanese dollar's unprecedented 6% surge over just two days – its largest in decades – reflects intensified hedging by domestic insurers and corporates amid unhedged foreign asset exposure. Though rumours of intentional currency manipulation amid trade talks with the US were denied, this appreciation highlights Taiwan’s economic vulnerability. Taiwan is the world’s fifth-largest foreign creditor with a massive net international investment position (NIIP) of USD1.7trn, of which USD300bn is in overseas life insurance investments. This casts a shadow over other Asian economies with large trade surpluses, with spillovers already visible from Malaysia to South Korea. However, contagion of a similar scale is unlikely, as Taiwan’s exceptionally large NIIP makes its situation distinct among regional peers. The TWD spike also signals a shift in global monetary tensions, raising fears of a new phase of financial instability, reminiscent of the 1987 Plaza Accord.
Authors
Lluis Dalmau
Allianz Trade
Françoise Huang
Allianz Trade
Allianz Trade
Patrick Krizan
Allianz SE
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Weekly on Allianz markets, macro, sector & insurance research by Ludovic Subran
