1 week Ago By Irina Slav
Benchmark oil prices hit the lowest level since the pandemic panic on Wednesday. Once again, the slump is caused by panic—this time, market panic as U.S.
President Donald Trump keeps turning up the tariff heat. For now, everyone seems to be in the grip of fear about what tariffs would do to oil demand. But there is one thing that low prices will definitely do: stoke up demand.
The latest oil price crash came Tuesday after Trump said he would impose an additional 50% tariff on Chinese imports following China’s retaliation against the last round of tariffs, which saw it add 34% to U.S. imports, matching the U.
S. tariff rate. Trump called on China to remove the retaliatory tariff.
China refused. Trump slapped it with that 50%, bringing the total to 104%. Brent crude has breached the $60 threshold, and West Texas Intermediate traded at just above $56 per barrel before soaring again after Trump announced a 90-day pause on tariffs for a large number of nations, but lifted those for China.
In the meantime, Asian oil imports are on the rise. if(window.innerWidth ADVERTISEMENTfreestar.
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write(write_html);} Reuters’ energy columnist Clyde Russell reported the latest changes in imports for the first quarter, noting that while January and February saw weaker imports of crude than last year, March marked a turnaround. Russell attributed the turnaround to refinery restocking and prices. Brent crude has dropped by more than $20 per barrel since January, and, per LSEG data cited by Russell, Chinese refiners had been drawing on their stocks in the first two months of the year, so some replenishment was in order.
Now, the important question is whether the increase in imports will continue. Related: Saudi Aramco Makes 14 New Discoveries as Oil Prices Bite With prices where they are, there is a pretty good chance they will. China has built a reputation for being quick to recognize a good bargain, and it will continue to take advantage of such bargains amid the price rout.
It won’t be just China, either. Cheap oil is good news for every consumer country, so chances are demand will strengthen in the coming weeks and months—unless the disastrous economic growth projections that analysts have been in a rush to produce since the beginning of the tariff war materialize. The chief argument in those projections is that tariffs add to the cost of a product, which results in higher end-prices, in turn prompting lower demand for that product.
Yet, currently, tariffs are causing a price crash in energy commodities, and when energy commodities are cheap, end products are cheap, too. In other words, the effect of the tariffs on energy commodities might, somewhat ironically, offset some of the effect that tariffs are having on end-prices of tariffed commodities and products. “China’s 50,000 bpd to 100,000 bpd of oil demand growth is at risk if the trade war continues for longer, however, a stronger stimulus to boost domestic consumption could mitigate the losses,” Rystad Energy’s vice president for oil commodity markets, Ye Lin, told Reuters this week.
True as that might be from a certain perspective that focuses on the primary effect of tariffs on goods, another perspective that takes into account the effect of prices on energy commodity prices suggests that the effect might be less dramatic than that. Put simply, when gas is cheap, people travel more—and refineries stock up, even if there is no immediate demand for more of their products. Also, the prices of things made using oil decline, too.
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The full effect of Trump’s tariffs has yet to be known, although the U.S. president has already demanded that the European Union buy more U.
S. oil and gas to eliminate its trade surplus with Washington. Speaking in numbers, Trump has demanded that the EU buy $350 billion worth of U.
S. energy commodities – with the current price rout, that would mean more oil and LNG than just a month ago. Also, China has already started reselling its U.
S. LNG cargoes to the EU, so that’s even more supply that would eventually push down prices as long as tariffs remain in place. This is, in fact, the biggest question of all: how long will the tariff war last.
The longer it does, the more pronounced the effects on actual physical markets will become. If the war ends in a couple of weeks, oil prices will rebound immediately, even with OPEC’s surprising decision to add 411,000 bpd to its daily supply. In the meantime, the slump in oil prices is a good, if not painful, way to gauge the health of the physical demand for oil.
Futures markets are all everyone looks at—along with Chinese economic figures—but physical demand is the real thing. If cheap oil pushes demand higher, as it has always done before, except in force majeure circumstances such as pandemic lockdowns, then prices will eventually start climbing. If physical demand is organically weak, low prices will only sink lower.
By Irina Slav for Oilprice.com More Top Reads From Oilprice.com.
