Oil Holds Drop as Trump's Tariff Threats Raise Trade War Concerns

Oil prices held steady on Tuesday, as traders weighed prospects for crude supplies after President Donald Trump's vow to boost already record U.S. crude output, the threat of a steep tariff on Canadian imports, and his call to replenish the Strategic Petroleum Reserve. West Texas Intermediate crude for February delivery CL.1 CLG25 fell $1.53, or 2%, to $76.35 a barrel on the New York Mercantile Exchange ahead of the contract's expiration at the end of the session. The more actively traded March contract CL00 CLH25 was down $1.54, or 2%, at $75.85 a barrel. WTI futures didn't settle Monday due to the Martin Luther King, Jr., Day holiday. March Brent crude BRN00 BRNH25, the global benchmark, declined $1.24, or 1.6%, to $78.91 a barrel on ICE Futures Europe.



Trump on Monday issued an executive order declaring a "national energy emergency" that will speed permitting of oil and gas production. He also removed the U.S. from an international agreement on fighting climate change. The moves "will allow more crude to flow into the market, which is suffering from a supply glut," said Samer Hasn, senior market analyst at XS.com, in market commentary. That may push energy prices further down, which is "what Trump aspires to do in order to serve his agenda of reducing inflation. Lower energy prices are a key factor in lowering inflation overall."

In his inaugural address, Trump said his administration would move to refill the Strategic Petroleum Reserve, which was tapped heavily during the Biden administration. "We will drill, baby, drill," Trump said, repeating an oft-used line from his election campaign. "We will bring prices down, fill our strategic reserves up again right to the top, and export American energy all over the world."

The measures are "not expected to have an effect on U.S. oil and gas production, at least not in the short term. Both have already risen to record levels despite the restrictions imposed to date," said Carsten Fritsch, commodity strategist at Commerzbank, in a note. Meanwhile, moving to quickly refill the SPR would provide support for crude prices. "In the short-run, the impact from replenishing the strategic reserves could outweigh (because doing that would withdraw oil from market quickly), while increasing production takes time," said Ipek Ozkardeskaya, senior analyst at Swissquote Bank, in a note. "But because Trump wants energy to be cheap, he would be advised to act slowly - which could have a limited impact on oil prices."

Trump, in remarks in the Oval Office, said he was considering imposing a 25% tariff on imports from Canada and Mexico beginning Feb. 1 - a move that could also serve to boost U.S. energy prices in the short term. If applied to oil, a tariff would affect around 4.5 million barrels, or around 70%, of daily U.S. crude imports, said Commerzbank's Fritsch. "It is impossible to source this volume elsewhere in the short term, especially as the oil from Canada and Mexico is urgently needed by U.S. refineries due to its special characteristics (density, sulphur content) and cannot be replaced by light U.S. shale oil," he said. "The refineries would presumably pass on the increased costs for crude oil imports from Canada and Mexico to U.S. consumers through higher gasoline and diesel prices."

As a result, the tariff threat appears more likely to be a negotiating tactic aimed at gaining concessions with Canada and Mexico on other issues such as border controls, Fritsch said.