Over the last few weeks, global financial markets, including oil, have received a broadside of uncertainties stemming from Trumps tariffs, that have been so unprecedented and fast changing that it has been very hard to keep up with it, let alone form a view as to what the future might hold. However, the key events are probably the following:
- Wednesday, 2nd April – Brent at 75 \$/b. Trump’s "Liberation Day" speech in which he announces late in the evening, wide ranging tariffs that he describes as being "reciprocal".
- Thursday, 3rd – Markets fall very sharply in reaction to the anticipated economic impact of the tariffs. Brent falls to 70 \$/b, further helped by a surprise announcement from OPEC+ that it will increase output by more than expected in May.
- Friday, 4th – China announces retaliatory tariffs seemingly signalling the start of a trade war. Markets fall sharply, Brent reaches a four-year low at 64.03 \$/b.
- Wednesday, 10th – Brent reaches its lowest level yet in this sell-off at 58.40 \$/b. Late in that day, Trump announces 90-day pause to tariffs that are over 10% for all countries other than China. Markets rally.
- Saturday, 12th – Trump announces exemptions from tariffs on smartphones, computers and some other electrical, including from China.
Prior to "Liberation Day" markets had clearly underestimated the full magnitude of the tariffs that Trump would announce. However, it would appear that Trump, for his part, had underestimated the strength of the reaction that they would bring about. He was initially dismissive of the market moves, expecting things to settle down, but the rising yield on US government bond yields became impossible to ignore. If the cost of borrowing for the US government were to continue to rise, it could undermine his administration. Seemingly in response to that risk, he announced the pause on tariffs and now, some exemptions.
Where do we go from here? Will the tariffs lead to a global economic slowdown that impacts oil demand? The apparent rowing back on the implementation of tariffs could suggest a more pragmatic approach which might lead to a watering down or complete cancellation on a country-by-country basis, as concessions are made and deals are struck over the next 90 days. The market was calmer at the end of last week, perhaps as a result of that line of reasoning and could be more so on Monday, as it reacts to the news of tariff exemptions announced today.
There are at least two reasons to be cautious though. Firstly, having been completely taken aback by the wide ranging nature of the tariffs and the crude methods used to determine them, it is a stretch to believe that markets can now be confident they know what Trump is planning or have any confidence that the pause on tariffs will lead to outcomes that do not disrupt trade. Second, there is the issue of the damage already done that could continue while uncertainty lasts. Businesses in the US and affected export countries, have been exposed to significant disruption and uncertainty that could have a lasting impact, even if tariffs are cancelled or significantly scaled back. It may take some time for these impacts to feed through into business activity and consumer confidence, so forecasters such as the International Energy Agency. They might be reluctant to revise down their demand forecasts significantly until they see clearer economic data, but the risk of oil demand failing to grow as had been expected, or even going into reverse, is clearly there.
OPEC+’s announcement of a greater than expected increase in output for May came as a surprise. This was followed up by Saudi Arbia cutting its official selling prices to Asia for that month, as it seeks to make its crude more competitive in what it presumably expects to be a buyers’ market. These developments bring back memories of 2015 when Saudi Arabia increased output in a falling market and competed for market share (an approach that became known as the market share strategy) after OPEC could not agree on an approach to dealing with rising US output that was oversupplying the market. It does not look that serious yet, especially as commercial oil inventories remain relatively low, but Saudi Arabia is perhaps firing a warning shot to some members that have been over producing. At low 60 high 50 \$/b prices it is already challenging for non-OPEC+ producers such as the US, to add to their output, but we don’t yet know is what the impact of all this will be on global demand – extra non-OPEC+ output might not be needed.
One thing we can be sure of is the historic price trends that oil has followed and this might give us some clues to lookout for in the future. The lows set recently by Brent bring it back to levels last seen when the market was recovering from covid. The price levels seen during covid itself are probably too extreme to be relevant here, but before that, in 2018 and 19, Brent traded mostly from 60 to 70 \$/b. In the second half of 2016 and during 2017, lows were in the 40 to 45 \$/b as the market recovered from the period of Saudi Arabia’s market share strategy. 60 to 70 might be appropriate for cautious optimism that fallout from tariffs is not too bad, but we could see dips lower if the there are signs of falling demand and OPEC+ members increase output in a falling market to maintain revenue.
No representation or warranty, express or implied, is or will be made and no responsibility or liability is or will be accepted by Investec or its Affiliates in relation to the accuracy, reliability, suitability or completeness of any information contained in this document and any such liability is expressly disclaimed. This document does not purport to be all inclusive or to contain all the information that you may need. Investec gives no undertaking to provide the recipient with access to any additional information or to update this document or any additional information, or to correct any inaccuracies in it which may become apparent.
This document does not take into account the specific investment objectives, financial circumstances or particular needs of any recipient and it should not be regarded as a substitute for the exercise of the recipient’s own judgement and due diligence. Investec does not offer investment advice or make any investment recommendations. Recipients of this document should seek independent financial advice regarding the appropriateness or otherwise of investing in any investment strategies discussed or recommended in this document and should understand that past performance is not a guide to future performance, and the value of any investments may fall as well as rise.
Investec expressly reserves the right, without giving reasons therefore, at any time and in any respect, to amend or terminate discussions with the recipient of this document without prior notice and hereby expressly disclaims any liability for any losses, costs or expenses incurred by such recipient.
