Trump's tariffs could become a 'major threat' for oil prices, analyst says
The White House says Mexico, Canada, and other countries may be exempted from President Donald Trump's steel and aluminum tariffs under national security "carve-outs." (March 7) AP
President Donald Trump's threat to impose tariffs on metal imports could create a perfect storm for oil prices to crash, according to one strategist.
Stephen Brennock, oil analyst at PVM Oil Associates, said such protectionist tariffs were a "major threat" to the demand side of the oil equation and would likely prompt a "vicious cycle" of downward pricing pressures. He added the move would be a "sure-fire" way to undermine economic trade and growth.
"Economic optimism and oil consumption go hand-in-hand, therefore, any adverse impact on the health of the global economy will dampen oil demand growth prospects … In short, a trade war would be a recipe for lower oil prices," Brennock said via email on Wednesday.
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'A global trade war does not bode well'
Trump's shock proposal last week to impose 25% tariffs on steel imports and 10% tariffs on aluminum demonstrated that he was putting into practice the protectionist policies he championed during his election campaign. Although the U.S. president highlighted national security as a reason for the move. The announcement set off a wave of uncertainty in markets, with stocks declining Wednesday as traders absorbed the developments.
Concern among investors was further exacerbated by Tuesday's resignation of top White House economic advisor, Gary Cohn. The Wall Street veteran was thought to be a bulwark against protectionist trade policies.
Brent crude futures and West Texas Intermediate (WTI) futures both fell more than 2% in the previous session as oil prices continued to move in tandem with the equity market.
"Unsurprisingly, the prospect of a global trade war does not bode well for the oil market. Evidence of this has been made plain by the recent sell-off on stock markets which weighed on sentiment across the energy complex," Brennock said.
U.S. stocks fell modestly Wednesday as investors struggled to get a read on U.S. trade policy after President Trump said Mexico and Canada could be exempt from tariffs. Fred Katayama reports. Video provided by Reuters Newslook
'Difficult to gauge'
The U.S. administration has since said it could offer Mexico and Canada a 30-day exemption from the planned tariffs, with an option to extend the deal depending on progress in NAFTA talks. Trump is expected to sign a presidential proclamation to establish the proposed tariffs before the end of the week.
Chris Main, oil and gas analyst at Citi, told CNBC that it remained "difficult to gauge" exactly how a full-blown trade war could impact the energy market.
The decision making progress regarding the tariffs remains in its "beginning phase and so it is unlikely to have a material impact on oil prices … But it can all change very quickly," he said during a phone interview with CNBC on Thursday.
Brent crude traded at around $64.06 on Thursday, down nearly 0.5%, while U.S. WTI crude was at $61.02, off by 0.2%.
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