The Trump administration’s 10% and 25% import tariffs respectively against Canadian and Mexican oil imports, which were suspended within 48 hours of being announced, whiplashed financial markets. © Reuters
Vandana Hari
Global oil markets have had a tumultuous start to 2025. Aggressive new U.S. sanctions against Russian oil, trade battles with Canada and Mexico and a renewed tit-for-tat tariff war with China have rattled markets already fatigued from geopolitical conflicts in recent years.
The Trump administration’s 10% and 25% import tariffs respectively against Canadian and Mexican oil imports, which were suspended within 48 hours of being announced, whiplashed financial markets. Both sets of levies were only deferred for 30 days, not scrapped, after the neighbouring countries agreed to curb illicit drug flows across their borders and into the U.S.
If the deals sour for any reason, in a few weeks, oil market stakeholders could once again be confronting the challenges of assessing the impact on Canadian and Mexican crude supply and the myriad possible repercussions across the global supply chain. Canada and Mexico pumped a daily average of 5 million barrels and 1.76 million barrels of oil respectively in 2024, together accounting for just under 7% of global supply. If one or both end up in a spiralling trade war with the U.S., the global market could lose at least some of their supplies for an indefinite period.
Trump’s intensifying trade war with China has direct and indirect consequences for oil demand as well as supply chains, creating another source of unpredictability in global balances and flows. The U.S. imposed an additional 10% tariff on Chinese goods imports from Feb. 4 on top of the roughly 10% existing weighted average levies against the country that were implemented during Trump’s first term in office.
China retaliated with a 10% tariff on U.S. crude imports and 15% on liquefied natural gas (LNG) and coal, starting from Feb. 10. Though the U.S. accounts for less than 2% of Chinese crude imports, its shipments had a 5.4% share of the Asian giant’s total LNG imports in 2024. Importantly, the moves could threaten the viability of a massive new wave of LNG projects under construction and in planning in the U.S. that need long-term commitments from Chinese buyers. Price-sensitive buyers across Asia have been eagerly awaiting the U.S. LNG capacity expansions to be able to secure their growing gas needs at affordable rates.
In trade negotiations aimed at curtailing the trade deficit with China and the European Union, the U.S. may demand that they purchase more of its oil and LNG, among other products. If agreed, this could set off a fresh chain of rewiring oil and gas flows around the world, adjustments that take time and can create market inefficiencies similar to those from sanctions and tariffs.
A man opens the hood of a Blue Energy 5528 liquefied natural gas (LNG) truck to check the engine at a manufacturing facility in Pune, India, on Oct. 11, 2024. © ReutersIran, a major oil exporter, is also in the crosshairs of the Trump administration over its controversial nuclear program as well as its backing of proxy regional militias, namely Hamas, Hezbollah and Houthis, who have been engaged in an intense war with Israel, a U.S. ally, since October 2023.
Trump on Feb. 4 issued a memorandum to revive his first term’s “maximum pressure” campaign against Iran, vowing to drive its oil exports to zero. The very next day, he toned it down, saying he simply wanted a new nuclear deal that would let Iran “prosper”. The Islamic Republic pumped about 3.3 million barrels of crude daily in December according to OPEC data and exported about 1.1 million barrels to China, virtually its only market.
The U.S.’s sweeping “Stop Harboring Iranian Petroleum” Act of last year, which threatens sanctions against ports, traders, refiners and shipping companies anywhere in the world that deal in Iranian oil, is a powerful new tool for the Trump administration to choke off supplies from the country.
While China could find replacement barrels from other producers, a reduction in Iranian exports would tighten global supply, pushing up crude prices. Uncertainty over how Iran responds to U.S. pressure and chances of a renewed spike in Mideast tensions like last year could stoke anxiety over oil supply and drive greater volatility in prices.
In the meantime, the disruption from sweeping new U.S. sanctions against Russian oil, which blacklisted nearly half of the “shadow fleet” of tankers that were hauling Russian crude to China and India, is still rippling through the oil and freight markets. Refiners in the two Asian countries have scrambled to seek alternatives for some of their Russian crude intake but remain uncertain on how to plan beyond the next few months. The sanctions could be unwound or watered down if the U.S. is able to broker a peace deal with Russia over Ukraine, which Trump has flagged as an urgent priority.
The laundry list of geopolitical tensions impacting oil does not end there. The Trump administration has so far been silent on Venezuela, but it does not recognize the government of Nicolas Maduro, who last month began his third term in power despite widespread allegations of stealing last year’s presidential election. A return of stricter U.S. oil sanctions against the South American nation that produces nearly 900,000 barrels of crude daily could add to the mountain of supply uncertainties.
On the demand side of the equation, a potentially nasty and lingering trade war between China and the U.S. risks becoming a major drag on the Asian giant’s economy and its already sluggish oil appetite. A lack of clarity over the extent of demand slump in the world’s second-largest consumer is prompting the OPEC/non-OPEC producers to protectively prolong their deep production cuts well beyond the initially intended timeframe.
This is a wake-up call for China, India and other major oil import-dependent economies of Asia that had hoped for some calm and stability in the new year, especially in view of Trump’s promise to put a swift end to the Ukraine and Gaza wars.
The turbulence of the first few weeks of 2025 is the new normal, not an aberration. While oil refiners and other market participants on the front lines will need to continue rolling with the punches, policy-makers need to strategize for an era of growing energy weaponization, resource nationalism and frequent and sudden rewiring of oil supply chains.
It’s time to accelerate domestic capacities in biofuels, renewables and other new energy sources. A strong cushion of national strategic oil reserves is vital, especially for the bigger consuming nations. China has done well in this regard, creating an estimated storage capacity of 2 billion barrels and filling up nearly two-thirds of it. India made a late start on its emergency reserve and only has a capacity of 39 million barrels, which is also about two-thirds full — a sign that the country needs to double down on building it out and filling it up.
Finally, it’s imperative for the Asian giants to bolster their relationship with the OPEC+ alliance through formal and informal communication channels and deeper engagements. OPEC’s Middle East producers will continue to provide the bulk of Asia’s crude needs for decades to come and are keen to be seen as stable and reliable partners, in contrast to the erratic energy powerhouse that the U.S. has turned into.
source : asia.nikkei