Oil prices rally as U.S tariffs raise supply risks

Oil prices rallied in the global commodity market on Monday as the U.S. slammed higher tariffs on its major suppliers, Canada and Mexico with a 10% tariff hike on China. Brent crude rose by 0.03%, trading at $76.33 per barrel, while the US benchmark West Texas Intermediate increased by 0.2%, reaching $73.56 per barrel. The tariffs imposed on imports from Canada, Mexico, and China are set to come into effect on 4 February. Failing to come to a deal would mean tariffs of 25% on Canadian and Mexican goods and 10% on imports from China. On Saturday, Trump signed an executive order imposing a 25% tariff on imports from Canada and Mexico, effective from Tuesday. Additionally, a lower 10% tariff will apply to energy resources from Canada. Trump also announced a 10% tariff on Chinese imports.
In response, China stated it would take measures against the tariff decision and file a complaint with the World Trade Organisation (WTO) while Prime Minister Justin Trudeau said Saturday that Canada has struck back on US tariffs with CAN$155 billion (US$106 billion) in tariffs on American products entering Canada. Experts believe that Trump’s wide-ranging tariffs on goods from Mexico, Canada, and China could harm global growth and potentially spark a trade war, reigniting inflationary pressures. The tariffs have fuelled upward price movements by raising concerns over supply disruptions from the US’ top importers. However, the prospect of significantly higher prices for US consumers and increased cost pressures on import-dependent businesses has tempered these price gains.
Meanwhile, market participants will follow OPEC’s Joint OPEC/non-OPEC Ministerial Monitoring Committee (JMMC) meeting scheduled for later in the day. During the meeting, members are expected to review current market conditions and discuss decisions regarding the global demand-supply balance. According to the group’s latest decision, voluntary production cuts will continue through the end of the first quarter of the year, while collective cuts are set to remain in effect until the end of 2026. For Canadian energy, the Trump administration decided to impose a tariff of only 10%. However, this has still seen NYMEX RBOB and ULSD trading stronger in early morning trading today, which also dragged WTI higher, ING says in a note on Monday.
Analysts said Canada is a key supplier of crude oil to the US, with the US importing around 4 million barrels per day (mb/d) from Canada, 61% of the country’s total imports. ING said this crude oil is heavier crude, which many US refineries are configured to run on, particularly in the Mid-West. Given the importance of Canadian oil to the US, it is not surprising to see that WTI is trading stronger this morning. In theory, tariffs mean higher feedstock prices for US refiners (which will ultimately be passed onto consumers). In 2023, 97% of Canadian oil exports went to the US, given that Canada has very few alternatives for where to export its crude oil, ING said.
“We are likely to see West Canada Select prices fall, which will see its differential to WTI widen. If Canada had a more sizeable export infrastructure allowing it to export to other external markets, Canadian oil producers would feel less pain from these tariffs.” Ultimately, given that Canadian producers have fewer alternatives than US refiners, Canadian oil producers are likely to feel relatively more pain from these tariffs.
Analysts said more broadly, an escalation in trade tensions is not supportive for risk assets, with it souring sentiment and raising concerns over the impact it could have on global growth, which means the strength in crude oil prices may be short-lived. The strength in the US dollar will also likely provide some headwinds, not just for oil but for the broader commodities complex.