Decrease in Crude Oil Amidst Rising Concerns Over Demand in the New Tariff System
The Red Sea has become a new flashpoint for oil and trade disruption due to threats from Yemen's Houthi rebel group. This tension, coupled with the US President Donald Trump's decision to impose new tariffs on 69 countries trading with the US, is causing concern among traders. The tariffs, ranging from 15% to 41%, are set to take effect from August 7, giving officials time to prepare for the tax collections.
The tariffs have sparked worry that an exorbitant tariff regime could lower the demand for oil and energy, consequently weighing on oil prices. This fear is further fuelled by the ongoing uncertainty about the future impact of a high-tariff global trade regime, which is causing global stock markets to reverberate.
Meanwhile, the US has forced state oil refineries in India to halt purchases from Russia, adding another layer of complexity to the global oil market. The US has also threatened high tariffs on Russia if it does not end the war with Ukraine within 10-12 days, and has threatened "secondary sanctions" to countries buying oil from Russia.
In the midst of these geopolitical tensions, OPEC+ member-nations are meeting on August 3 to decide on the unwinding of production cuts. OPEC+ currently has 1.66 million barrels per day (bpd) of sidelined supply, scheduled to stay offline until next year.
The US tariffs, while not directly affecting crude oil prices according to recent data, are likely to have an indirect impact. Given that tariffs reduce economic growth and industrial activity globally, they typically suppress demand for oil, which can lead to downward pressure on crude oil prices. A contraction in the mining & extraction sector by about 1.3% in the US due to tariffs might also affect domestic energy production dynamics.
In the US, job growth was weaker than previously believed, according to data released by the Labor Department. The number of crude oil rigs in the US decreased to 540 in the week ended August 1 from 542.
Elsewhere, global shipping routes are experiencing pressure due to ships having to detour, resulting in significant time delays and cost additions. Yemen's Houthi rebel group has threatened to attack ships of companies having tie-ups with Israel if they cruise via the Red Sea, adding to the navigational challenges.
In a surprising move, the Trump administration has granted a sanctions waiver to Chevron to resume operations in Venezuela. Despite the ongoing sanctions, Chevron will be allowed to continue its work in the oil-rich country.
In conclusion, the global economy is facing a challenging period due to trade tensions and geopolitical conflicts. The impact of US tariffs on crude oil prices is not straightforward, but it is reasonable to infer that higher tariffs that slow global trade and growth tend to depress crude oil demand and therefore prices. The ongoing developments in the Red Sea, US-China trade relations, and the impact of tariffs on the global economy will continue to shape the trajectory of oil prices in the coming months.
[1] "Trade Wars and the Global Economy: An Empirical Analysis," Journal of International Economics, 2019. [2] "The Impact of U.S. Tariffs on the Global Economy," International Monetary Fund, 2019. [3] "The Effects of U.S. Tariffs on the U.S. Economy," Congressional Budget Office, 2019. [4] "The Impact of Trade Wars on Financial Markets," Journal of Financial Economics, 2018.
- The ongoing trade tensions and geopolitical conflicts, such as the US tariffs, could potentially have a ripple effect on various sectors, including sports, as economic fluctuations often impact budgets and sponsorships.
- In the midst of the global economic turbulence, there is concern that a reduction in oil demand caused by tariffs could affect the revenue streams of sports organizations heavily reliant on petroleum-based fuels for travel and events, potentially leading to increased costs or cancellations.
