(Bloomberg) -- Oil extended its decline amid a US threat to slap new tariffs on China and as tensions ease in the Middle East, while global supply surplus concerns underpinned bearish gloom.

West Texas Intermediate crude prices slumped as much as 4.6% to near $59 a barrel, the lowest intraday price since May. US President Donald Trump said he saw “no reason” to meet Chinese President Xi Jinping and threatened a “massive increase” of tariffs on goods from China. The statements revived concerns that a tariff war between the world’s two largest economies would hurt oil consumption. They also blunted appetite for risk assets, hurting equities.

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“If Trump were to follow through on these latest threats, it would result in negative economic consequences and a hit to crude oil and refined product demand,” said John Kilduff, founding partner of Again Capital LLC.

Traders had largely written off the possibility of extreme US tariffs against China following an amicable exchange between Trump and his Chinese counterpart, after which Trump said he would meet Jinping on the sidelines of the Asia-Pacific Economic Cooperation summit later this month. The about-face in sentiment comes as China slapped port fees on American ships in retaliation for similar US measures, a move that threatened to bolster freight rates.

Commodity trading advisers, which can accelerate price momentum, liquidated long positions to sit at 91% short in WTI on Friday, compared with 55% short on Oct. 9, according to data from Bridgeton Research Group. Brent was holding at a similar level, the group added.

“Crude is facing a triple whammy today — renewed tariff tensions weighing on the demand outlook, a broader selloff in risk assets keeping dip buyers on the sidelines, and systematic strategies likely adding to short positions,” said Rebecca Babin, a senior energy trader at CIBC Private Wealth Group. “Without a catalyst to buy the dip we could see an outsize move today before finding support.”

In another headwind, Israel approved a framework that would see Hamas release hostages in exchange for prisoners, a major step toward a peace agreement to end the bloody conflict in Gaza which has destabilized the Middle East, the source of a third of the world’s crude. The development siphoned any remaining risk premium associated with the conflict out of crude prices.

Meanwhile, oil markets are heading for a significant surplus fueled by rising output from both outside and within the OPEC+ alliance, which agreed over the weekend to raise production quotas to reclaim market share. The broad mood remains bearish, though there are discrepancies about how gloomy crude’s prospects are, according to Citigroup Inc., which summarized views from clients.

Oil’s descent on Friday was likely also driven by so-called gamma effects, with outsized options exposure clustered near $60. Puts at that level are the most held bearish contract for the next year with 109,000 lots of open interest. Dealers hedging behavior could make price action more volatile as futures swing near $60, and a move lower could force them into further selling.

--With assistance from Yongchang Chin and Omar El Chmouri.

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