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Oil Reverses Gains on Tariff Truce

WTI crude oil (CL) experienced a rollercoaster on Monday, 3 January, following a busy weekend marked by tariff threats set to commence today (4 January). 

While prices surged over $1 per barrel after the announcement of levies on Mexico, Canada, and China, including on energy products from Canada, they reversed course to close near a one-month low. This drop was a result of separate 11-hour announcements on social media by representatives of the US, Canada, and Mexico that the planned 25% tariffs would be delayed for at least 30 days.

In an ongoing blow to oil, Tuesday sees prices 2% lower, weighed down by the temporary truce and the activation of tariffs on Chinese oil imports. The levy triggered reactions in China, with Beijing's retaliation on oil and LNG reducing risk premium.

Oil pump jacks against American flag backdrop at sunset

Planned Tariffs Trigger Initial WTI Surge

Following through on previous executive orders signed at the Inauguration, US President Donald Trump's confirmation of a 25% levy on Canadian and Mexican imports and 10% on Chinese imports saw oil prices rally on Monday. Before private conversations with neighbouring leaders Justin Trudeau, who recently stepped down, and Claudia Sheinbaum took place, Canada initiated an equal tariff slated for Tuesday. At the same time, Mexico committed to taking retaliatory action. 

As the market awaited the OPEC+ first meeting while evaluating the impact of tariffs, including a reduced 10% import tariff on Canadian energy resources, both WTI and Brent (EB) benchmarks gained. Energy resources from Canada include natural gas and liquids, refined petroleum products, critical minerals and other condensates, including oil. 

Tariffs Could Impact the World’s Economies

Canada and Mexico account for around a fourth of the US oil domestic refiners process into different fuels, including heating oil (HO) and gasoline (RB). For context, the US imported approximately 1.5 million barrels per day (bpd) from both countries just last November, according to the latest EIA data.

Tariffs are known to raise costs for US refineries, leading to increased costs at the pump and, in turn, higher inflation and pain for the US consumer at the pump. Boston Fed President Susan Collins echoed such a view but noted that there was no urgency for the Federal Reserve to act. Yet, a slowdown in economic growth from higher inflation led some analysts to raise questions about Trump’s plan to reduce oil prices.

Meanwhile, OPEC+ discussed Trump’s calls to increase oil production during its first meeting of the year on Monday. However, the cartel still decided to maintain the extension of oil cuts until the end of March, when it expects to gradually phase out 2.2 million bpd of cuts until September 2026. The pushback may have been related to the Joe Biden Administration's previous sanctions on Russian oil.

A Last-Minute Tariff Deal Weighs on Oil

The OPEC+ event was likely overshadowed by tariff-related wires, with volatility rising following the postponement of tariffs. Both Canadian and Mexican leaders managed to agree with President Trump on the burning issue of border control. The 30-day truce comes with commitments to mobilise 10,000 troops to protect the borders and crack down on immigration and drug smuggling. (Source: Newsquawk)

Mexico struck the temporary deal first, committing to avert immigration and fentanyl flows to the US. Following the positive outcome of the Mexican deal, Canada also made commitments and dialled back prior retaliatory threats to reach a similar agreement. The relief from the two deals reduced the chances of a full-blown tariff escalation, which some analysts feared. Lipow Oil Associates had estimated that tariffs, including the 10% levy on Canada’s oil, could increase gas prices in the US by about 15 cents, going as far as predicting the possibility of a worldwide recession scenario. However, China remains a tariffed country without a deal.

China’s Plays High-Stakes Retaliation Card

The US and China have yet to reach a deal. Trump has not even offered a similar deal to the one he offered to Canada and Mexico to the Chinese. With the 10% levy effective as of this morning, Tuesday, China countered the US move with a 15% tariff on coal and Liquified Natural Gas (LNG) from the US, along with an equal 10% tariff on crude oil, both commencing 10 February. Although the risk for tit-for-tat remains, China imports around 2% of its oil from the US, with many analysts pointing to a costly encounter. 

Following Trump’s announcement over the weekend, China condemned the move and called for counter-measures. In fact, it filed a lawsuit with the World Trade Organisation (WTO), noting that it "not only fails to address America's own issues [but also] disrupts normal China-US economic and trade cooperation." Trump claimed that China is responsible for the fentanyl crisis in the US, highlighting the country’s efforts to control illegal production. However, several analysts gathered that the US is looking to gain economic and political leverage. (Source: Yahoo News)

The swift, last-minute resolution with Canada and Mexico is indeed seen as a negotiating tactic by many analysts, a way to operate some sort of platform for the Trump administration to achieve the goal of lower oil prices and inflation. However, until China and the US come to the negotiating table, the current state of affairs leaves a challenging environment where market participants must evaluate the risk of supply disruptions versus de-escalation.

Conclusion

Trump’s bold tariff tactics have set off reactions in the global oil market, with analysts and traders trying to evaluate geopolitical and market moves. With China's last-minute truce of tariffs and retaliatory measures, uncertainty remains high.

As geopolitical developments, escalating or de-escalating, continue to shape oil prices and sentiment around future supply and demand, every newswire could be a turning point and perhaps a lasting one.

However, past market reactions do not reflect the future.

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