Trump’s 50% tariff threat for EU clouds oil demand outlook

A May 23 proposal by US President Donald Trump to impose blanket 50% tariffs on the European Union has reignited recession fears that could slash oil consumption and put pressure on refiners.

In a post on the social media platform Truth Social, Trump recommended the imposition of the high tariff rate from June 1, complaining that the EU has been "very difficult to deal with" on trade negotiations.

The proposed 50% tariff sits well above the previous 20% rate for the EU that was announced by Trump on April 2, but later paused for 90 days and dropped to 10% in the interim.

Analysts were quick to caution that proposed levels are likely to represent a starting position for transatlantic negotiations, noting the recent breakthrough in US-China trade after months of tough rhetoric.

"Such a large tariff would probably be unsustainable. But some level of higher tariffs is likely," said S&P Global Commodity Insights analysts James Bambino and Richard Joswick in a note.

The EU ran a EUR198.2bn ($225 billion) surplus with the US in 2024, making it its largest trade partner and a key outlet for machinery, agricultural goods and oil products.

According to ING, a 50% tariff could translate to around a 0.6 percentage point reduction in EU GDP growth, taking the eurozone economy close to recession territory.

Economic hit

Responding to tariff uncertainty in April, S&P Global Commodity Insights had already substantially downgraded European oil consumption forecasts.

In a monthly refined product demand outlook published on April 30, Commodity Insights analysts cut European GDP growth expectations from 2.5% to 2.2%, translating to around 50,000 b/d less diesel demand in 2025 and 10,000 b/d less jet fuel consumption.

Goldman Sachs analysts say that every 1% decline in global GDP could reduce oil timespreads beyond one year by roughly $8/b, accounting for the demand stimulus of low prices and likely reduction in non-OPEC production.

Nonetheless, oil benchmarks proved largely unreactive to the news on May 23. European Brent crude futures lifted from around $63.4/b around 12:00 GMT to around $65/b by 14:30.

The depth of the economic fallout remains subject to retaliatory measures by the EU as tariff details are hashed out. EU lawmakers have already prepared counter tariffs valued at approximately Eur95 billion, which were deferred by 90 days to July 14 to allow for negotiations with the US.

In an attempt to support discussions, the bloc offered a Eur50 billion trade deal including LNG purchases and soybeans, but a lack of progress could spur a tougher policy approach, analysts have warned.

Energy exemptions uncertain

To date, Europe's major US export market for refined oil products has stayed immune to tariffs. However, traders remain alert to the risk that energy flows could be caught in the crosshairs of a deteriorating transatlantic trade relationship.

As a region long on gasoline, European refiners typically export vast quantities of the motor fuel to the US, peaking at around 300,000 b/d - 400,000 b/d in the summer months.

With US driving season fast approaching and regional gasoline cracks already strong, most speculators expect the Trump administration to steer clear of energy tariffs that could translate to higher fuel prices for American drivers.

However, other industry experts say that gasoline flows remain eligible for tariff escalations, warning of significant fallout for both trade partners.

In the US, curbed European supplies could quickly lift East Coast PADD 1 prices, where stocks are often structurally low and sensitive to supply disruptions, said Rebeka Foley, a Commodity Insights oil analyst.

Meanwhile for Europe, a drop-off in US flows could compound sector-wide challenges for refiners, which have already struggled with shrinking export demand from West Africa, Foley said.

UK exposure

With few export alternatives, EU refiners could look to the UK market to clear a potential supply glut. However, the country's refiners have stayed confident that they can stave off additional import pressure if its European neighbors became subject to tougher energy tariffs.

"To the extent this reduces US demand for EU products, we could see more product flows into the UK market," Viral Gathani, a Senior Managing Director at EET Fuels, owner of the UK's Stanlow refinery, told Platts on May 23. However, he remained confident that cheaper logistics costs would keep national producers competitive.

Yet despite relative resilience in the EU and UK economies over recent months, macroeconomic risks continue to loom large. The Eurozone manufacturing Purchasing Managers Index, a proxy for manufacturing activity, hit a 32-month high in April, but remains in contraction, and economic uncertainty has clouded consumer sentiment.

"Refined product sales and margins are very sensitive to the general macroeconomic health of the UK economy, and the UK and European economies will both be impacted by any tariff-induced slowdown in the US economy, which is technically quite likely," Gathani said.