Oil prices have experienced an initial surge following President Donald Trump's implementation of hefty tariffs on Canada, Mexico, and China. However, experts suggest that this spike may be short-lived, with prices likely to decrease in the long term. The tariffs are expected to force oil producers in Canada and Mexico into steep price discounts due to limited refining capacity and alternative export routes.
Currently, the U.S. West Texas Intermediate crude oil has risen by 1.75%, reaching $73.8 per barrel. Meanwhile, U.S. gasoline futures have also seen an uptick, with RBOB Gasoline futures climbing 2.81% to $2.11 per gallon. Despite this upward trend, the global oil market may face a downturn after the next quarter as tariffs exacerbate the demand picture.
The Organization of the Petroleum Exporting Countries Plus (OPEC+) has been withholding 2.2 million barrels per day from the global market in an effort to prevent further price declines. However, the group is under increasing pressure from President Trump to reverse these production cuts. Trump has recently urged Saudi Arabia and OPEC to reduce oil prices, though the oil cartel has yet to respond to his request.
Canada and Mexico are expected to face significant challenges due to the tariffs. Canadian oil producers, in particular, will likely bear the brunt of this burden, facing a $3 to $4 per barrel discount on Canadian crude. This discount is exacerbated by limited alternative export markets. Canada and Mexico accounted for approximately 62% and 7%, respectively, of all U.S. crude oil imports in the first ten months of last year.
U.S. refiners are poised to process more domestic crude oil while seeking alternatives from the Middle East. As a result, Canadian and Mexican oil producers may find themselves forced into offering discounted prices due to their limited options for refining and export.
"While the initial move on crude oil is upward, a cycle of tariffs and retaliatory actions by Canada, Mexico, China and perhaps others in the future could lead to a worldwide recession, causing oil prices to plummet," – Andy Lipow, President of Lipow Oil Associates.