The Crude prices have been somewhat range bound over the last month or a little bit less. Brent hasn’t gone below $70/bbl, but also been unable to return to its pre-election levels. Markets are clearly taking some time to digest the implications of different policy changes expected in the coming year.
One of the themes might be a shift in the focus of geopolitics. Over the last couple of years, war and the threat of military escalation have been major themes driving crude prices. Starting with the war in Ukraine, the tensions between Israel and Iran and Houthi rebels of Yemen attacking shipping in the Red Sea. But, now there is serious talk of reaching some kind of agreement over Ukraine, while Israel and Hezbollah hold a shaky, two-month truce. The focus, it seems, is moving away from shooting wars as potential catalysts, to tariffs and trade wars driving prices.
A Shot Across the Bow
Not even in office yet, Donald Trump is giving every sign that he will continue his habit of disrupting markets with social media announcements out of the blue. In less than a week, he’s sent out threats of tariffs that have directly affected major crude producers, with potential consequences for the markets. This could have an increasing effect once he takes office next month.
The first was a threat of a 25% tariff across the board on Canada and Mexico, both large producers of crude. Canada in particular is relevant, as being the largest exporter of crude to the US. America sources over half of its imports, and around one fifth of its consumption, from Canada. About 97% of Canada’s crude production is shipped south, meaning that if the tariffs are actually implemented, it could have an impact on the price. After all, the US is the largest consumer and producer of petroleum fuels in the world.
Negotiations and Unexpected Outcomes
BRICs countries were also targeted by threats of tariffs, which includes major crude producers like Russia and Brazil. But, it also seems that Trump is repeating another tactic of his first administration: Threaten tariffs in order to get concessions in other areas. Like back in 2019 when he threatened Mexico with tariffs which were never applied after the implementation of the “remain in Mexico” policy that Trump widely credited with reducing immigration. His recent threats of tariffs on Mexico and Canada were over immigration and illegal drugs, while he targeted BRICs over a potential alternative reserve currency.
This could leave many traders reassured that the tariffs won’t actually go into place, because the targeted nations offer concessions. That is not always the case. China, for example, did get tariffs applied to its goods. Past policy decisions by the Trump administration have shown that the threats are not hollow. The most recent ones, around immigration and a currency that doesn’t even exist, might be easy to resolve. But what happens if Trump issues a tariff threat over something that the target country can’t resolve? For example, a tariff on Germany or the EU if it doesn’t step up defense spending – when both the French and German governments are fractured precisely over the difficulty in meeting their current payment obligations.
The Near Term Impact
Before Trump is in office, he can’t actually effectuate the threat of tariffs. In the meantime, it has been reported that his administration plans sweeping changes that would allow for a large increase in crude production “on day one”. With global crude prices already under pressure due to slow demand from poor economic growth in Europe and China, the world’s largest importers, a surge in supply could keep prices under pressure.
The upcoming OPEC+ meeting was originally set to discuss how to ease production curbs in the coming year. But with low prices being a potential threat as both the IEA and OPEC cut their demand forecasts for next year, the oil cartel might be more inclined to keep production at bay. Or, it might be more worried about losing market share. The outcome of Thursday’s meeting could shake up the oil market substantially , influencing the Crude Prices
