- Trump promised to impose a 25% duty on goods from Canada and Mexico.
- US crude inventories increased by 3.46 million barrels last week.
- Fed officials voted to keep interest rates unchanged.
Oil prices paused after collapsing in the previous session as market participants worried about looming tariffs on Canada and Mexico. Notably, these two countries supply most of their oil to the US. Moreover, a surge in US crude inventories last week indicated weak demand, dampening sentiment.
Oil prices peaked on 15th January and have maintained a downward trajectory since then. Some fundamentals supporting the bullish move at the start of the year have faded. The ceasefire deal between Israel and Hamas put a pause on the Middle East conflict, reducing the risk to oil supply. Meanwhile, the likelihood of tariffs on China dimmed the outlook for demand.
Brent & WTI futures (Source: ICE, Nymex)
Starting this Saturday, Trump promised to impose a 25% duty on goods from Canada and Mexico. Canada’s government has said it will take measures to control the impact of likely tariffs. Top officials are confident that these tariffs will impact both economies. Therefore, there is a chance the two will negotiate better trading deals. Otherwise, a trade war will likely hurt oil demand.
Elsewhere, data on Wednesday revealed that US crude inventories increased by 3.46 million barrels last week, putting more downward pressure on oil. The drop in demand came amid winter storms in the US.
Traders also watched the FOMC policy meeting, where officials voted to keep interest rates unchanged. Powell gave little guidance on future rate cuts, suggesting a cautious outlook. The US Central Bank might wait for incoming data to gauge the state of the economy and inflation.
Furthermore, policymakers were likely cautious due to the uncertainty surrounding Trump’s policies. His proposals on tariffs and taxes create a bullish outlook for the economy. Therefore, markets anticipate robust growth and high inflation.
If the Fed lowers borrowing costs too fast, policymakers might have to hike again when the economy rebounds. Therefore, the best approach is to wait and see. This week, the US will release its core PCE report, which will shape the outlook for interest rates. High borrowing costs are bearish for oil as they curb demand.
Meanwhile, the looming OPEC+ meeting will provide more clues on supply trends. The organization has been postponing supply increases since last year. However, traders expect members to start unwinding cuts in the second quarter of this year.
