Oil markets navigate Trump’s tough talk and tariffs

View Full Transcript

Joel Hanley:

Hello and welcome to the Oil Markets podcast from S&P Global Commodity Insights. I'm Joel Hanley. In this episode, we are taking a closer look at Donald Trump after a pretty dramatic start, what effect can the returning American president have on oil markets? Love him or hate him, and it really does seem to be one or the other, you can't ignore Donald Trump. Since returning to the US presidency in January, he has started delivering on some of his hefty pre-election rhetoric. He is yet to stop the war in Ukraine with a single phone call, but he has imposed a serious set of tariffs on Mexico, Canada, and China, shaking up international trading relationships and turning diplomatic tension up to 11. Now, the 25% tariffs slapped on Canadian and Mexican goods at the start of February have already been postponed, so more negotiation can take place, but Trump's punish now, talk later strategy doesn't seem to wash with the Chinese.

Beijing has already announced counter tariffs of 15% on American coal imports and 10% on crude oil and liquefied natural gas from February the 10th, and not only could these tariffs affect the prices of the products being shipped, but also the shipping markets themselves. Now, this is a very volatile and fast-moving situation, of course, so in this podcast, we will touch on the tariffs, even though some of them may be further revised very soon, and we're also going to take a look at what Trump means for oil markets. He's clearly very keen to flex his own particular brand of diplomacy, and OPEC+ can expect to hear from him very soon. Now, with me to discuss all this, the two of our news team. In London, we have Thomas Washington, who is a senior writer here, and also Herman Wang, who heads up our oil news team here in the UK. Welcome, both. Tom, while the Mexican and Canadian tariffs are currently on ice for a few weeks, the reaction has been voiced by traders, and also in the assessments and the numbers themselves. What are you seeing out there?

Tom Washington:

Right. Well, Joel, as you said, there's already been a reaction. On the third, you saw crude rising up through the morning session for swaps. They ended up coming down a little bit. In ice gas soil that, it did edge up by the end of the day, but the interesting thing for me here is, aside from the speculative issues about where does this go, the discussion of these tariffs has already had an effect. When OFAC announced a wave of sanctions, pretty heavily focused on the shipping market earlier on in January, pretty soon after that you saw the Shandong Port Corporation say they would restrict sanctions ships coming in. You also had noises from India that they would be taking less Russian crude.

The general understanding amongst most of the market watchers I've been talking to is that this was to position themselves ahead of these tariffs. Now, there's a lot of talk about, "Hey, yeah. Well, the volumes haven't run down completely." They've already started to change a little bit and this was always going to take some time. Firstly, there's the wind down period. Also, you've to take into account how long it takes a ship to sail from A to B. You could be looking at a good 40 days or so. This was always going to be slow burn. We've already started seeing some effect in that case, so just the discussion of these has already had an impact, but the latest we've heard on tariffs is that they've been postponed, not shelved, so that discussion remains wide open.

Joel Hanley:

And with the world's trade map still with ink fresh from the Ukraine situation, and how the trade flows have had to be totally redrawn, frankly, we've started to see across that map, different trade routes, different trade flows, and maybe we'll start to see heavier sour crude coming over from Latin America or from Europe to fill some of that gap into the states if, for example, Canadian and Mexican sanctions are maintained come a month's time or so. That could reposition ships. It could lead to a global change of freight assessments again. We've seen a lot of disruption in that world already, but could this re-disrupt it?

Tom Washington:

I'd say, definitely. So in terms of what we've seen already, VLCCs have strengthened. Directly after those restrictions that earlier came in, we saw VLCCs going to China despite. Now, I would caution that part of that was also the approach of the Lunar New Year, but certainly there was an element of sentiment now as well. VLCCs have continued to strengthen. They certainly haven't weakened. That, we've seen already. In terms of where it could go from here, no one really knows how Europe will factor into the new administration administration's plans or not, but certainly, you've got a not insignificant volume of clean products coming from the US.

It's hard to say, obviously, how that plays out, but if I was an owner of MRs, involved in transatlantic trade, I would be a little nervous about that. The other thing, also, is that if these tariffs, to any extent whatsoever, do go ahead with Canada and Mexico, that also is implications for Europe. Of course, these markets all highly integrated, because what the prospect of Mexican and Canadian tariffs means for US refiners is that their crude is more expensive. That makes less competitive. One interesting thing that appeared over the course, the trading day in Swaps and third, was that you did see that gap between higher Brent, lower WI close a bit, and that could be a little taste of what we had to come.

Joel Hanley:

Yeah. We'll have to see what effect that has on international assessments and, indeed, Data Brent, which of course includes US crude coming over to Europe, so it'll be interesting to see the impact there. We will have to wait and see if the EU and the UK will be on Trump's hit list, but it's sounding quite likely at the moment, and we might expect to see more tariffs slapped on them too. Tariffs tend to be slapped, don't they? I've noticed that in recent rhetoric. Herman, turning to other parts of President Trump's strategy, what does he mean for OPEC+?

Herman Wang:

Yeah. Well, I mean, this is an interesting time for OPEC to try and manage this market, because already going into this year, even before Trump was elected, you already had the prospect of muted growth in Chinese demand. You have rising production in the US, Brazil, Guyana, other rival producers to this OPEC+ coalition, so it's already going to be kind of a tough market for OPEC+ in 2025. Now, you add in Trump and the unpredictability there, and one of the conversations I had with one of the OPEC delegates, he told me that OPEC is looking for sustainable clarity. Sustainable clarity, and when you have an unpredictable president, like Trump, OPEC always has stuff that they can control and stuff that they can't control, right?

Joel Hanley:

Don't we all.

Herman Wang:

Yes, as with everybody. What OPEC, obviously, can control is member production, and they know that their member production, that has influences on demand and prices, and they can kind of control those knock-on effects, to a certain extent. Now, you have a president coming in Trump, where you've got potential sanctions on various OPEC+ members, Russia, Iran, Venezuela. You've got the tariffs that we've just been talking about, Canada, Mexico, China, perhaps the UK, EU, as you just mentioned, Joel, and then trade wars as a knock on effect of those tariffs, potential trade war, US China trade war, and Trump hasn't been shy before about using his pulpit to try and get OPEC+ to manipulate their production to get a price that he wants, and he's not been shy about that already. Now, the sense I'm getting from OPEC+ is that they're a little bit more wary of Trump this time around.

They remember, I think it was 2019, or maybe it was 2018, when Trump put pressure on Saudi Arabia and OPEC+ to raise production because he was going to ramp up sanctions on Iran, and he wanted Saudi Arabia to increase production by a million barrels per day. Well, they did it. Then, a couple of weeks later, Trump announced that he was going to give sanctions waivers on Iran, and really caught OPEC. They felt blindsided by it, and that really take the price, and so they were quite wary of that. They remember also when the Abqaiq attack happened, and they wanted Trump to come out with a really forceful military response to that. They didn't get it, and so they felt a little abandoned there. So, I think there are a couple elements here. Even though the US and Saudi Arabia have a closer relationship under Trump than they did under Biden or Obama, I think there's a certain wariness of where Trump is going with some of his policies and how that's going to impact oil markets.

Joel Hanley:

Well, once bitten and twice shy, it does make sense. You mentioned OPEC+ can control the production of their members. Of course, this has actually been a bit of an issue with some members recently. We're talking here against the backdrop of increased production from the Tengiz field. So, CPC Blend out of Kazakhstan is about to get a boost of 250,000 barrels a day from that, and Kazakhstan's been one of the regular offenders when it comes to non-compliance. Now, just recently there's been the Joint Ministerial Monitoring Committee meeting. That was on February the third, and it seems to have focused on compliance, and is OPEC+ a bit more comfortable now?

Herman Wang:

Yeah. I think Kazakhstan is definitely an interesting story to watch going forward. As you mentioned, this Tengiz expansion project that Chevron has just announced, that they've started it up, and by the time it fully ramps up in Q2, that's going to be 260,000 barrels per day of additional Tengiz crude coming into the CPC blend. Now, Tengiz crude, as is right now, about 700,000 barrels per day, that's about half already of Kazakhstan's quota under this deal, and so if Tengiz ramps up by another 260,000 barrels per day, you can see how they're going to be way over their quota. As you mentioned, Kazakhstan has been one of the more lackluster, shall we say, members of OPEC+ in terms of their compliance with their quota, generating a lot of distress among the other members who feel like they're free riding on their efforts.

Iraq is another one that we're watching closely. Now, Iraq has just suffered a fire to the Ramallah field that has knocked about 300,000 barrels per day of production offline. That's going to, unfortunately, help with their OPEC+ compliance, probably not in the way that they want it, but we're going to see the numbers within come out in a couple of days of what production in January was, and with the impact of that fire on the Iraqi production figures, but then you've also got the continued negotiations with the Kurdistan Regional government, trying to unlock those exports that have been shut in for a long time. That was 450,000 barrels per day of sour crude in the Mediterranean market going through the Port of Çeyhan in Turkey, that have been shut for almost two years now.

Those negotiations continue, so there's a lot of potential leakages into the market from these OPEC+ members that have already, as I said, drawn the ire of their fellow OPEC+ members for free writing on their other production cuts. There's some other members out there as well that we're looking closely at. The UAE, for example, is another one. Russia has also come into the cross-hairs a couple of times on compliance. OPEC+, as you say, this is the one thing they can control, keeping their own house in order and making sure that there's not any extra production onto the market than they signal.

Joel Hanley:

Right. I don't know how far up the President's agenda or whose to-do list is to speak with the likes of Kazakhstan or Iraq, or I guess Saudi is the kind of proxy of the statesman for the rest of the OPEC+ conglomerate, if you will, but if we move away from Donald Trump for a moment, and we probably won't thank us for not talking about him for a second, but Herman, aside from him, are there any other issues that OPEC+ needs to look out for in the next few months? Well, you've listed a few there. Absolutely. What else is on their big agenda?

Herman Wang:

Yeah. I mean, all eyes in the market have obviously been on China, and China, as the demand growth engine for the oil market last couple of years. A lot of troubling signs out of China if you're a bull in the market, and this demand growth out of China, we've seen some stimulus efforts announced by the Chinese government to try and juice that demand, and just industrial activity, that will juice that demand going forward. We'll have to see if that bears fruit. The other big thing that OPEC+ likes to talk about a lot is interest rates and what central banks are doing. Here in the UK, we're about to see potentially a modest cut.

The Fed has kind of paused their cuts for a while. They're worried a little bit about inflation. Of course, energy prices are a contributing factor to inflation in some cases, so it's kind of a balancing game, as far as what OPEC+ considers a fair range in terms of what central banks can do to influence interest rates, influence the economies in their markets. So, what the Fed's going to do, what the ECB is going to do, the UK, the Bank of England's going to do, Bank of China. Chinese Central Bank as well, what they're going to do in terms of these stimulus projects to try and stimulate demand in China, which is the world's largest importer of oil.

Joel Hanley:

Indeed, although actually China doesn't import an enormous amount of US oil, maybe about 2%. Maybe that's the absolute maximum of Chinese imports or Chinese used oil comes from the US, but I think something that I did notice in one story that will make the Trump administration sit up and take notice is that there is also a 10% tariff on US electric trucks, and I think we know who the biggest purveyor of those is. All right, Herman. Thank you very much. Thank you, Tom, as well for your contribution in today's podcast. And before we go, I'm delighted to say that registration for the Platz London Energy Forum 2025 remains open. You can join us on February the 24th, and come along and hear the key theme, which is serving tomorrow's markets. We're going to be looking at how we integrate traditional energy markets with future energies. Always a hot topic. The event is free to attend as always, and you can find the link in the show notes.