Key Takeaways
- Oil futures slumped to trade near their lowest levels in years as oil markets digested President Trump’s tariffs on major trading partners and impending OPEC+ production hikes.
- Market participants are concerned that the tariffs on Canadian, Mexican, and Chinese goods that went into effect yesterday could accelerate U.S. inflation and slow growth across the continent, creating headwinds for oil demand.
- OPEC+, the global oil cartel led by Saudi Arabia, announced on Monday that it would begin increasing oil production starting in April, gradually unwinding production cuts made in November 2023.
Crude oil futures tumbled to trade near their lowest levels in years on Wednesday as jitters about U.S. tariffs and a surprising production hike from OPEC+ rattled commodities markets.
West Texas Intermediate (WTI) crude futures, the U.S. oil benchmark, fell as much as 4% on Wednesday to trade at $65.22, near its lowest price since late 2021. Shares of U.S. oil companies, including ConocoPhillips (COP) and ExxonMobil (XOM), followed crude prices lower.
Oil markets have been rattled in recent days by President Trump’s imposition yesterday of a 25% tariff on Canadian and Mexican goods. Trump also doubled tariffs on Chinese imports to 20%.
The first time Trump threatened to hit Canadian and Mexican imports with tariffs, at the end of January, oil prices rose amid concerns the tariffs would limit supply. This time around, market participants are concerned about the toll that the levies and retaliatory measures could take on the global economy.
The tariffs are widely expected to slightly speed up U.S. inflation and slow economic growth in the near term. They’re expected to take an even bigger toll on the Canadian and Mexican economies, potentially plunging two sizable oil markets into recession.
Oil prices have been driven down from Monday’s OPEC+ decision to increase oil production starting in April. The gradual increases will unwind the production cuts the group of major oil producers committed to in November 2023.
Lower oil and gas prices were a major focus for Trump on the campaign trail last year. He promised America would “drill, baby, drill” to reduce transportation costs and, ultimately, temper inflation. Oil prices have fallen steadily under Trump, with WTI down about 15% since his inauguration, and fuel prices have declined marginally over the past month.
Rising oil prices feed into inflation both by increasing the cost of gasoline for drivers and by increasing production and transportation costs for businesses. Research indicates oil prices can also impact inflation expectations, a meaningful contributor to actual price increases.