Oil prices sink to over 4-year low on tariffs concerns; OPEC+ in a pickle?

Oil prices fell to their lowest levels in over four years on Friday after China imposed retaliatory tariffs in response to US trade measures earlier in the week.

In a significant escalation of the ongoing trade war, China has announced its decision to impose additional tariffs of 34% on all goods imported from the US. 

This move, set to take effect from April 10, comes as a direct response to the Donald Trump administration's recent decision to raise tariff barriers to their highest levels in over a century.

The global community has been bracing for a trade war, with nations around the world preparing retaliatory measures against the protectionist policies of the US. 

Trump tariffs send shockwaves

The imposition of these tariffs has sent shockwaves through the global financial markets, leading to a significant plunge in investor confidence and a sharp decline in stock prices.

The trade war, initiated by the US, has disrupted global supply chains and created uncertainty in the international trade environment. 

The escalating tensions between the world's two largest economies have raised concerns about a potential global recession and have prompted calls for a de-escalation of the trade conflict.

At the time of writing, Brent crude oil futures on the Intercontinental Exchange were at $65.05 per barrel, down 7.3%.

The West Texas Intermediate crude oil on the New York Mercantile Exchange dropped 8% to $61.68 a barrel. 

Both benchmarks fell to their lowest since the middle of the COVID-19 pandemic in April 2021.

Also, the contracts were on track for their worst losses in percentage terms in over two years. 

Further weakening of oil demand

“There are concerns that the tariffs will lead to a further weakening of oil demand, especially as China is particularly hard hit by the reciprocal tariffs,” Carsten Fritsch, commodity analyst at Commerzbank AG, said in a report. 

Fritsch added:

The global trade war is all but inevitable due to China's aggressive response to US tariffs. 

This conflict will stifle economic growth and reduce demand for essential commodities, including crude oil and refined products.

Ultimately, there will be no winners in this trade war, according to Saxo Bank’s head of commodity strategy, Ole Hansen.

It is important to note that US refineries are not subject to tariffs on crude oil imported from Canada and Mexico, as energy imports are exempt from tariffs.

“Demand for Canadian oil could nevertheless fall in the short term, as US refineries have apparently brought forward purchases in anticipation of tariffs,” Commerzbank’s Fritsch said.

US crude oil imports from Canada increased 11% in the last reporting week, reaching their highest point since early January, as reported by the US Energy Information Administration.

OPEC+ in a tight spot

Oil’s decline has been further intensified by the Organization of the Petroleum Exporting Countries and allies’ decision to raise output sharply in May. 

Eight members of the OPEC+ alliance in a ministerial meeting on Thursday decided to increase oil production by 411,000 barrels per day in May, according to an official statement. 

The eight members, including Saudi Arabia and Russia, are scheduled to unwind some of their voluntary production cut of 2.2 million barrels per day in April.

This month, the cartel will increase oil output by 135,000 barrels per day after months of extending the voluntary production cuts.

The OPEC+ decision comes across as unexpected, considering the significant drop in oil prices on Thursday. 

In the press release, OPEC+ justifies the move by highlighting the sustained positive market outlook and the prevailing healthy fundamentals.

“It is possible that the decision was made before US President Trump sent oil prices plummeting with his tariff announcements,” Fritsch said. 

In many ways, Thursday’s decision by OPEC+ now seems as though it needs revisiting. The cartel will not be comfortable with oil prices hovering around $60 per barrel. 

It will be interesting to see what OPEC’s next move is, given that it said on Thursday that the supply increase could be “paused or reversed subject to evolving market conditions”.