Why Oil Markets Should Fear Trump’s Trade War

Authored by Nick Cunningham via OilPrice.com,

“We’re putting the trade war on hold,” U.S. Secretary of Treasury Steven Mnuchin said on “Fox News Sunday,” nearly two weeks ago. That didn’t go down well with President Trump who promptly restarted the trade war.

Not only did Trump step up trade penalties on China, announcing a few days ago that tariffs on $50 billion worth of Chinese goods would go forward, but he moved to impose tariffs on Canada, Mexico and the European Union, the U.S.’ closest allies and trade partners. The tariffs will include a 25 percent levy on steel and 10 percent on aluminum. Months ago, Trump proposed these tariffs, but repeatedly offered exemptions to allies while U.S. officials negotiated with their counterparts to come up with a resolution.

But, the U.S.’ trade partners refused to give ground, especially since the Trump administration subsequently launched an investigation into automotive imports, which led the EU, in particular, to come to the conclusion that offering concessions would only be met with demands for more concessions.

Sensing he was losing leverage, Trump ripped up that playbook and moved to impose the steel and aluminum tariffs immediately.

Needless to say, Canada, Mexico and the EU promptly announced retaliatory action. Moreover, many argue the U.S. tariffs are illegal under WTO and NAFTA. “The American administration has made a decision today that we deplore, and obviously is going to lead to retaliatory measures, as it must,” Canadian Prime Minister Justin Trudeau said in a statement, announcing retaliatory tariffs on U.S. steel, aluminum, as well as an array of other products.

And in a testament to how ill-conceived the U.S. strategy is, even the United Steelworkers union opposes the move. “The regular chaos surrounding our flawed trade policies is undermining the ability to project a reasoned course and ensure that we can improve domestic production and employment,” the union said in a statement.

What is worrying for the Trump administration is the fact that Canada, Mexico, the EU and China are all retaliating and ceding very little ground. It’s extremely difficult to imagine the U.S. being able to force such a long list of countries into giving in, especially since Trump is fighting a trade war on so many fronts at once.

The escalating trade war could lead to significant fallout for the oil market, although for now, the extent to which it impacts demand is unclear.

“Recent signs of protectionism from the U.S. are a risk to the forecast, raising the possibility of a global trade war,” the IEA said in March, when Trump originally proposed tariffs. “A slowdown [in global trade] would have strong consequences, particularly for fuel used in the maritime sector and in the trucking industry.”  

The oil and gas industry, typically an ally of the Trump administration, criticized the tariffs.

“The implementation of new tariffs will disrupt the U.S. oil and natural gas industry’s complex supply chain, compromising ongoing and future U.S. energy projects, which could weaken our national security,” said API President and CEO Jack Gerard in a statement. Oil and gas pipelines use a special type of steel, much of which is not made in the United States.

“If you consider that U.S. oil and gas companies spent $8 billion to $9 billion on pipe last year alone, this would increase material cost by more than $2 billion dollars per year if they sourced all of that material from outside of the United States,” Ed Longanecker, president of the Texas Independent Producers & Royalty Association, told S&P Global Platts.

Josh Zive, a trade attorney with Bracewell, told S&P Global Platts that industries using steel have already started to see costs creeping up. “It’s difficult to perceive any scenario in which that doesn’t increase” at an accelerated pace, he said. The Trump administration is offering a process in which individual companies can apply for exemptions, and Zive says that the new tariffs will lead to thousands of such requests.

The real danger for oil prices is that Trump’s trade crusade curtails oil demand at a time when OPEC and its non-OPEC partners could begin adding oil back into the market. On a similar but somewhat unrelated note, Bank of America Merrill Lynch recently outlined a pessimistic scenario in which the possibility of an emerging market slowdown occurred at a time when OPEC increased production, a combination that could ultimately push oil down to $60. The bank didn’t even factor in Trump’s trade war, which could upend growth in industrialized countries as well.

Trump is being criticized from all corners, including many in his own party, but for now he is moving forward with an aggressive trade approach.

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