Oil markets breathed a sigh of relief on Tuesday as the United States announced a pause on imposing tariffs on Mexico and Canada, two major suppliers of crude to the American market. This decision helped ease concerns about potential disruptions to the flow of oil into the world’s largest economy.
Brent crude, the international benchmark, slid 0.87% to $75.30 a barrel by mid-afternoon UAE time, while West Texas Intermediate (WTI), the main gauge for US oil, dropped 1.54% to $72.03 a barrel.
President Donald Trump’s administration agreed to postpone a planned 25% tariff on Mexican and Canadian imports for a month. In return, both neighboring countries pledged to step up their efforts in border security and crime prevention. Canada’s energy exports were particularly relieved, as they were facing a reduced tariff of 10%.
Canada and Mexico collectively supply a significant portion of crude to the US. According to the US Energy Information Administration, American refiners imported about 4.6 million barrels per day (bpd) from Canada and 563,000 bpd from Mexico as of October 2024. The threat of tariffs had loomed large over the energy sector in all three countries.
“US refiners would need to source heavy crude from farther away, increasing their freight costs. Alternatively, if they continue sourcing from their neighbors, they’ll have to negotiate for discounts to absorb the tariff’s cost or pass it on to consumers,” explained Vandana Hari, CEO of Vanda Insights.
While Mexico might find alternative markets for its oil, Canada faces a tougher challenge. Limited export infrastructure could force Canadian producers to either accept lower prices or cut back production, as oversupply meets inadequate transport capacity.
Adding to the global trade tensions, the US has already implemented 10% tariffs on Chinese goods, prompting China to retaliate with tariffs on American coal, liquefied natural gas, and crude oil starting February 10. Though US energy exports to China are relatively small, a renewed trade conflict between the economic giants casts a shadow over global trade and could curb demand for crude oil.
The ongoing trade wars are reminiscent of Trump’s first presidency. After igniting a tariff battle with China in 2018, both nations had exchanged billions in tariffs before signing a “Phase One” trade deal in January 2020. This fragile peace required China to ramp up purchases of US goods and services by $200 billion over two years, a goal that remains elusive.
Meanwhile, OPEC+ maintained its cautious approach, opting to stick with the production cuts of 2.2 million bpd announced in December. These cuts, which started in November 2023, are set to continue until March, before gradually easing until September 2026.
“OPEC+ is likely to keep an eye on how these tariffs impact economic growth and the broader market,” said Giovanni Staunovo, a strategist at UBS. “We believe the group will aim for market stability this year, which should keep oil prices around current or slightly higher levels.”
President Trump has urged OPEC+ to lower oil prices, suggesting cheaper crude could help end the conflict between Russia and Ukraine. Whether this diplomatic maneuvering will pay off remains to be seen.
Stay tuned as we continue to follow these critical developments in the global oil landscape.
Read more: Trump’s New Tariffs: Costly move or smart strategy?
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