- Oil dropped Thursday after Trump confirmed a 25% tariff on automobile imports.
- Traders are also grappling with the likelihood of an increase in supply in May.
- Trump threatened a 25% tariff on countries importing Venezuelan oil.
Oil prices pulled back on Thursday as investors worried about the implications of an automobile tariff on oil demand. At the same time, market participants worried about Trump’s tariffs and escalating trade wars that would hurt global oil demand.
Oil dropped Thursday after Trump confirmed a 25% tariff on vehicle imports to the US starting next week. Higher prices for cars will mean lower demand. This in turn will hurt demand for oil. At the same time, the tariff will likely escalate trade wars with Canada and the Eurozone, threatening growth in the global economy. Weak growth will also negatively impact oil demand, putting pressure on prices.
Furthermore, the US is set to implement more tariffs on various imports like chips and pharmaceuticals. At the same time, traders expect tariffs on Canada and Mexico and reciprocal tariffs on many countries that trade with the US. Therefore, there is a high chance trade tensions will escalate, further threatening oil demand. Already, the US has imposed a 20% tariff on Chinese goods, threatening growth in a country that is the largest consumer of oil.
Traders are also grappling with the likelihood of an increase in supply in May. OPEC is planning to start unwinding its output cuts, which would hurt oil prices. Poor demand and increasing supplies would likely put prices in a downtrend.
However, in the previous session, oil soared to new highs for the week after Trump threatened a 25% tariff on countries importing Venezuelan oil. As a result, China, the largest buyer of this oil paused its imports. The tariff threat will likely tighten the oil market and redirect China to import oil from other producers like Russia. Tight supply is bullish for oil.
Oil futures (Source: ICE, Nymex)
At the same time, optimism came from a report showing a surge in US oil demand last week. Crude inventories fell by 3.3 million barrels, bigger than the forecast of a 956,000 barrel draw.
Moreover, market participants have been keeping an eye on US recession fears which eased slightly this week. Data at the start of the week revealed that business activity in the US improved in March. This was one positive after a series of downbeat data. It eased fears of a rapid slowdown and weaker oil demand.
