NEW YORK (Reuters) – Oil prices plummeted more than 6% on Thursday, declining for the first time in six days, after U.S. President Donald Trump said he would impose an additional 10% tariff on $300 billion worth of Chinese imports starting Sept. 1.

FILE PHOTO: A pump jack operates in the Permian Basin oil production area near Wink, Texas U.S. August 22, 2018. REUTERS/Nick Oxford

A prolonged trade war between the world’s two largest economies has triggered worries about oil demand.

Brent crude LCOc1, the international benchmark, fell $3.85, or 5.9%, to $61.20 a barrel by 1:46 p.m. ET (17:46 GMT), having dropped as low as $61.03. U.S. West Texas Intermediate (WTI) CLc1 crude was down $4.09, or 7%, at $54.49 after sinking to a low of $54.34.

“Oil prices have fallen considerably, today, done in by a one-two punch of the underwhelming Federal Reserve easing moves and the announcement by President Trump that more tariffs will be placed on imported Chinese goods,” said John Kilduff, partner at Again Capital Management.

“The U.S.-China trade war has damaged the energy demand outlook greatly, already, and this will only add to those concerns. The trade war is clearly far from over.”

Prices were pressured earlier in the session after the Fed reduced interest rates on Wednesday, but against expectations the head of the U.S. central bank said the move might not be the start of a lengthy series of cuts to shore up the economy against global economic weakness.

The Fed’s less dovish than expected message triggered a rebound in the dollar, sending the dollar index .DXY to a 26-month high of 98.93 on Thursday. A stronger dollar makes greenback-denominated oil more expensive for holders of other currencies. The dollar index turned negative after Trump’s comments.

Oil’s drop on Thursday came after a bigger-than-expected fall in U.S. inventories and a drop in OPEC production in July, typically bullish drivers for prices.

Inventories at the Cushing, Oklahoma hub, the delivery point for U.S. crude futures, fell by 1.5 million barrels between Friday and Tuesday, traders said, citing data from market intelligence firm Genscape.

But U.S. output remained near a record, above 12 million barrels per day (bpd), making the country the biggest producer in the world.

Output in Texas, the largest producing state, rose by 16,000 bpd to 4.97 million bpd in May, a record high, U.S. government data showed.

Graphic: U.S. crude inventories, weekly changes since 2017 –

“The market was already wobbly on reports by analysts that production would increase faster than demand by 1 million barrels per day in the new year. That kept the oil market under pressure even when the stock market went up,” said Phil Flynn, analyst at Price Futures Group in Chicago.

“But the final straw for the oil market was when Trump imposed these additional tariffs and caught the market by surprise. It is raising concerns that the tariffs will slow economic growth and cause a drop in oil demand.”

U.S. manufacturing activity slowed to a near three-year low in July and a measure of new orders received by factories rebounded slightly, as the negative effects of the U.S.-Chinese trade war took their toll.

Other data on Thursday showed the number of Americans filing for unemployment benefits rose last week, while construction spending fell in June as investment in private construction projects tumbled to its lowest level in 1-1/2 years.

Total U.S. oil demand in May fell 98,000 bpd to 20.26 million bpd, data showed on Thursday.

OPEC and partners including Russia, an alliance known as OPEC+, have been curbing output this year to support the market. In July, OPEC production revisited a 2011 low, helped by a further cut by Saudi Arabia, a Reuters survey showed.

Additional reporting by Scott DiSavino in New York, Alex Lawler in London, Aaron Sheldrick; Editing by David Evans, Steve Orlofsky and Jonathan Oatis

Our Standards:The Thomson Reuters Trust Principles.

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