A lot has been happening in the crude space, giving mixed messages to the markets. There was already a lot of uncertainty due to geopolitics, but now that tariffs have been added to the mix, there is another layer of questions. This could contribute to increased volatility, but analysts say the trend will be lower going forward. Are those analysts correct?
On Monday, crude prices spiked higher, with Brent gaining 3.0% to touch the $75/bbl level. But just a day later, the trend appeared to be fading. To be fair, Tuesday was the start of OPEC+ move to ease up on their production curtailments, implying increasing supply. But markets still seemed to be more nervous about geopolitics after US President Donald Trump threatened secondary tariffs on Russia and military strikes on Iran.
Setting an Example
The US is expected to slap secondary tariffs on Venezuela starting on April 2nd, targeting any country that buys oil from the South American nation. But production from Venezuela is down dramatically from its peak years ago, and it currently is exporting less than 1M bbl/day. That is still considerable, but well within Saudi Arabia’s 3M bbl/day voluntary curtailment. As such, the application of the tariff regime might be seen more as a model of what the US could do to larger producers, such as Russia and Iran. During his prior term in office, Trump reduced Iranian production by half.
Part of Tuesday’s crude price retracement could be attributed to a bit of a softening of Trump’s rhetoric around Russia and Iran. It appears the American president is still pursuing a ceasefire deal that would likely include a resumption of Russian oil exports. On top of the expected increase in supply from OPEC+ over the coming months, this could generate substantial downward pressure on crude.
Estimates Falling
A survey of economists conducted last week showed that the average price expectation for Brent this year is just under $73/bbl. That would be below the price scored following Trump’s comments over the weekend. The situation for WTI is similar, with the Dallas Fed Energy Survey projecting an average of $68/bbl this year, rising to $70/bbl average next year.
Tariffs are generally seen as raising prices, but so far that hasn’t been the case for crude. The White House slapped a 10% tariff on crude imports from Canada last month, with producers moving to reduce prices in order to preserve their American customers. While Canada is trying to export more crude to China, the extra transportation cost apparently outweighs the tariff.
For a broader perspective on how tariffs influence forex markets, see The Impact of Tariffs on Forex.
It’s Still About Growth
Last week it was reported that US oil production reached its lowest level in 15 months during January. The Trump Administration’s push to increase production will still take a while to actually generate results. And lower prices would reduce the move towards production increases.
Meanwhile, uncertainty over global economic growth means market participants are still worried about demand. In that line, Saudi Arabia disclosed last week that it was cutting prices of crude sent to Asia as demand has faltered. Despite massive stimulus to support the economy, China’s activity remains relatively muted, and could face further headwinds from additional tariffs.
