Yesterday was a big day for oil prices, up nearly $9/bbl. ICE Brent crude surged more than 3.5% and hit its loftiest level in more than a month. This upward price surge occurs against a tumultuous stock market and a confusing environment shaped by ongoing geopolitical strife and changing US crude oil stockpiles. President Trump announced that he is providing Russia with a 10-day deadline to reach a ceasefire agreement with Ukraine. Together, this move is increasing the spotlight on the global oil market.
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Going back to last week’s EIA report, US crude oil stockpiles grew by 1.5MMbbls. The increase came despite a 4.2 million barrel build in distillate stocks. This increase alleviated some concerns of a potential squeeze in the middle distillates market. The counterintuitive gasoline stocks fell sharply by 1.7 million barrels, adding to concerns about the supply picture overall.
President Trump’s ultimatum was already turning up the heat on Russia. The country has become a net exporter, exporting more than 7 million barrels of crude oil and refined products daily. Analysts had generally expected a much bigger increase in US oil supplies to materialize over several months. This self-imposed delay only adds to the trouble. Major consumers of Russian oil are acutely aware of the risk of secondary tariffs on their oil imports. Key US trading partners might think twice about continuing those purchases if sanctions start to ramp up.
The consequences of not achieving a diplomatic resolution are grave. Should these negotiations falter, further sanctions on Russia will likely be unavoidable. This would risk drawing our allies into secondary tariffs if they’re importing Russian oil. If done right, experts say 100% secondary tariffs could completely change the oil market’s playing field. This change would dramatically shift trade flows and pricing relationships.
With the deadline looming, Trump’s next moves are being nervously watched by market participants. Now, investors are looking at the administration’s commitment to secondary tariffs. A good chunk of that uncertainty is due to fears over future shocks to global oil supplies.
The recent rally in oil prices is a direct response to these geopolitical developments. The market responded positively to Trump’s first confirmation that the US-China trade negotiations remain on a 10-day period of grace. Investors are hopeful that this increases the chances for a settlement to the months-long feud. Lurking behind the corner is the specter of sanctions and tariffs, which threatens to roil the market stability that has settled in.