Global oil markets experienced significant turbulence on Monday, with crude futures sharply rising in response to the latest escalation in trade tensions. The imposition of sweeping tariffs by the U.S. on Canada and Mexico, key suppliers of crude oil to the United States, has ignited fears of potential disruptions in supply chains.
West Texas Intermediate (WTI) crude futures climbed by 1.88% to $73.89 per barrel, while Brent crude futures saw an increase of 0.96% to $76.40 per barrel. These price hikes followed the announcement of tariffs on a wide range of goods from these North American neighbours. The 10% tariff specifically targeting Canadian energy products and the substantial 25% tariff on Mexican energy exports to the U.S. are expected to significantly impact the oil market.
U.S. refiners, heavily reliant on crude imports from Canada and Mexico, are bracing for a significant increase in input costs. These two nations supply a substantial portion of the crude oil processed by U.S. refineries, as reported by the U.S. Energy Information Administration (EIA). Industry experts have warned that the tariffs could disproportionately impact the price of heavier crude grades, which are crucial for optimal refinery operations. This could potentially reduce profitability for refiners and may even force production cuts.
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While the immediate impact on prices appears bullish, concerns are mounting about the potential long-term consequences of the trade war. A decline in global demand, driven by the weakening economic outlook amidst heightened trade tensions, could exert downward pressure on oil prices. This scenario could potentially force oil producers, including the OPEC+ alliance, to adjust their production levels to balance the market.
However, the OPEC+ alliance, comprised of members from the Organisation of the Petroleum Exporting Countries (OPEC) and key non-OPEC producers, is unlikely to immediately succumb to any pressure to curtail production. Delegates from the cartel have signalled their intention to adhere to their existing plan for a gradual increase in output. A formal decision on this matter is expected to be reached during their upcoming meeting on Monday.
The current situation underscores the delicate interplay between global trade dynamics and energy markets. As trade tensions escalate, the oil market faces increased uncertainty, with potential consequences for both consumers and producers.
