Goldman Sachs has provided estimates that a proposed 10% U.S. oil tariff could cost foreign producers $10 billion per year, with Canadian and Latin American heavy crude producers heavily reliant on U.S. refiners due to limited alternative buyers and processing capabilities. Trump plans to impose a 25% tariff on Mexican crude and a 10% levy on Canadian crude starting in March. However, Goldman Sachs has predicted that the U.S. will remain the primary destination for heavy crude thanks to advanced refining capabilities and low costs. However, Goldman says that U.S. consumers would pay a much higher price, with an annual tariff cost of $22 billion, while the government would generate $20 billion in revenue.
Last week, China announced retaliatory tariffs on American energy imports and also announced an antitrust investigation into Google, just minutes after a sweeping levy on Chinese products imposed by U.S. President Donald Trump took effect. Beijing said it would implement a 15% tariff on coal and liquefied natural gas (LNG) products as well as a 10% tariff on crude oil, agricultural machinery and large-engine cars. Well, the tariffs came into force on 10 February, marking the beginning of another trade war between the world’s biggest economies under Trump. Commodity analysts at Standard Chartered have delved into the potential effects of the tariffs on the U.S. energy sector.
StanChart has pointed out that China first levied a tariff of 10% on U.S. LNG imports in September 2018 and then increased to 25% in June 2019. StanChart notes that whereas some imports continued at the 10% rate, there were none at the higher rate. Beijing then granted tariff waivers for LNG in February 2020 as part of a trade war de-escalation and after 11 months of zero flows, with the first US cargo arriving in April 2020. According to the analysts, in the following 59 months, there have been cargoes in all but three months. Further, the relationship between U.S. producers and Chinese LNG buyers has deepened with some long-term contracts signed. In contrast, no long-term LNG contracts between the two countries were signed prior to 2021.
However, the potential negative effects of the latest tariffs on LNG are likely to be limited. The U.S. currently provides less than 6% of China LNG imports, while China accounts for just 6% of U.S. exports. With Europe’s demand for U.S. LNG likely to remain robust, StanChart has predicted that displaced flows are unlikely to become distressed. StanChart sees the tariffs cutting the flow of spot cargoes to China dramatically, with some flows under longer-term contracts likely to continue, depending on the nature of re-export clauses. The experts have warned that the biggest threat of these tariffs is the economics of future long-term contracts, including contracts amounting to at least 15 million tonnes per annum (mtpa) that have already been signed.
Oil Prices Steady On Potential Ukraine Peace Deal
Oil prices were little moved on Monday as markets awaited clarity on ongoing talks by the U.S. and Russia to end the war in Ukraine, as well as a potential resumption of crude exports from northern Iraq. Brent crude for April delivery was up 0.4% to trade at $74.76 per barrel at 12.15 pm ET while WTI crude for March delivery gained 0.6% to change hands at $70.77 per barrel.
Trump initiated talks with Russia without inviting Ukraine or the European Union to the table. Russian and U.S. teams plan to meet for further discussions this week. Ukrainian president Volodymyr Zelenskiy announced on Sunday that he is willing to step down if it means peace for his country.
A ceasefire to the Russia-Ukraine war could be bearish for oil prices if Trump pushes for removal of sanctions on the Russian energy industry, Tyler Richey, co-editor at Sevens Report Research, told MarketWatch. Geopolitical stability may also “largely extinguish the still simmering ‘fear bid’ in the oil market.” The latest sanctions by the Biden administration roughly tripled the number of directly sanctioned Russian crude oil tankers, enough to affect around 900,000 barrels per day (bpd). Whereas it’s highly likely that Russia will try to circumvent the sanctions by employing even more shadow fleet tankers and ship-to-ship transfers, StanChart sees 500,000 bpd of displacements over the next six months.
However, the oil price selloff kicked off before Trump’s latest mediation efforts in the Ukraine war thanks to rising U.S. crude stockpiles and hawkish remarks from Fed Chair Jerome Powell. Jerome Powell said on Tuesday that the Fed is not rushing to cut interest rates further because the economy is in a good place, but it is prepared to do so if inflation drops or the job market weakens. Higher interest rates increase the cost of borrowing, which can slow economic activity and weaken oil demand. The U.S. consumer price index (CPI) increased at a faster-than-expected clip in January, reinforcing the Federal Reserve’s wait-and-see stance before cutting interest rates further amid growing uncertainty over the economy. The CPI jumped 0.5% last month, up from 0.4% in December, and advanced 3.0% in the 12 months through January after advancing 2.9% in December.
By Alex Kimani for Oilprice.com
