- Oil gained over 4% after Trump paused reciprocal tariffs.
- Trump significantly increased tariffs on China, imposing a 125% levy by Wednesday.
- Data on Wednesday revealed an unexpected increase in US crude inventories.
Oil prices pulled back from the previous session peaks as the trade war between China and the US escalated with new tariffs. Initially, there was relief in the markets after Trump announced a ninety-day pause for reciprocal tariffs on most countries. However, the US-China trade conflict is keeping risk appetite low.
Brent daily price change (Source: Bloomberg)
Oil paused its decline and reversed on Wednesday, gaining over 4% after Trump paused reciprocal tariffs. Initially, prices were dropping rapidly due to fears of a global economic slowdown. Trump had imposed reciprocal tariffs on most countries that trade with the US. This would have reduced global trade, affecting growth. Poor growth in the global economy lowers oil demand. Consequently, the sudden pause in tariffs brought relief as it eased fears of a global recession.
However, Trump significantly increased tariffs on China, imposing a 125% levy by Wednesday. Meanwhile, China imposed an 84% tariff on US imports, showing neither side is ready to surrender. The trade war between China and the US can still hurt the global economy since these are the two largest economies. At the same time, China is the largest consumer of oil. Therefore, an escalation in the trade war is bearish for oil prices.
Elsewhere, data on Wednesday revealed an unexpected increase in US crude inventories. Stocks rose by 2.6 million barrels compared to forecasts of a 1.4 million barrel increase. The surge indicated weaker demand last week, putting downward pressure on oil.
Meanwhile, on the supply side, market participants expect a surge in the coming months that might weigh on oil. Notably, OPEC+ plans to start unwinding its output cuts in May. More oil in a market where demand is low could mean a downtrend.
Elsewhere, traders are keeping an eye on US economic data which will impact the outlook for Fed rate cuts. Last week, employment figures revealed a surge in US job growth in March. However, the unemployment rate also unexpectedly increased to 4.2%, painting a mixed picture.
Meanwhile, Powell said the Fed needs time to assess the impact of Trump’s tariff before making the next move on rate cuts. So far, Trump’s on-and-off tariffs have caused a lot of market turmoil and uncertainty about the impact on the US economy. The next major economic report will show the state of inflation.
