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Canada oil tariffs could weigh heavily on global markets

Most respectable economists believe it is also bad news for the US economy

Canada oil tariffs Reuters/Greg Locke
Oil rig supply ships load cargo at St John's in Newfoundland. Canada is a very important trading partner in US crude

For oil markets, President Trump’s widely heralded but still-shocking declaration of a trade war against US neighbours Canada and Mexico, and long-term enemy China, is just another variable in a global scenario assailed on all sides by uncertainty.

You cannot envy energy policymakers picking their way through this minefield – as delegates from the Opec+ oil alliance led by Saudi Arabia and Russia attempted to do at the latest ministers’ monitoring meeting on Monday.

From a macro-economic viewpoint, Opec+ has to weigh the basic question of whether the tariffs will prove to be a brake on global economic growth, and therefore demand for crude.

The IMF has said that tariffs will further depress an already-lacklustre growth forecast of 2.7 per cent in 2025 – not good news for oil demand.

Even aside from the effects on the economies of the three countries directly involved, with Europe next on the hitlist, it is difficult to see any positive outcome from what Capital Economics, the London think tank, called a “very destructive global trade war”.

Most respectable economists also believe it is bad news for the US economy too – but try telling that to the president.

The tariffs against China are part of a much wider antagonism that could get a lot worse, but the immediate concern for oil watchers is the potential effect on global oil supplies of the actions against Mexico and Canada.

Mexico’s northbound exports of around 500,000 barrels per day (bpd) are important for that country, but less so in the global scheme of things.

Canada is different. Contrary to Trump’s boast of US “energy dominance”, it remains a very important trading partner in American crude.

Four million bpd of the heavy sour crude favoured by mid-west refineries come across the northern border, and in their total absence the US will probably have to turn to sanctioned Venezuela, or to the Middle East – neither outcome desirable from a MAGA mindset.

There are already signs of renewed interest in seaborne exports from northern Pacific ports towards Asia

Alternatively, reducing activity at US refineries will impact jobs and alienate the oil industry that bankrolled Trump’s campaign. Those consequences – and the likely inflationary pressures that follow on from tariffs – are a matter for US consumers and domestic policymakers.

Global oil markets are more interested in what will happen to the crude flow from Canada that can at least be reduced or cut altogether if the trade war ratchets up in an escalatory spiral.

Losing 4 million bpd of exports would be a huge blow for Canada, and the country will want to export as much as it can via sea to compensate at least partially. Some shipping analysts reported yesterday that there are already signs of renewed interest in seaborne exports from northern Pacific ports towards Asia.

So, although oil prices jumped higher in early Monday trading after the tariff announcement at the weekend – on the vague explanation of “disruption to supply” – analysts at Goldman Sachs said there was unlikely to be much significant impact.

In the longer term – depending on the intensity of retaliatory measures and the duration of the US-Canada trade war – there arises the outside possibility of an ocean of Canadian oil just waiting to hit global markets when and if the tariffs are lifted.

This is not what Opec+ wants to hear as it ponders how to reintroduce 2.2 million barrels in supply by April – the latest schedule for returning barrels cut to ensure stability and balance.

It adds to the other factors that have to be weighed by Opec+, like the Iranian exports of around 1.5 million bpd that are under renewed threat from Trump, the prospects for Russian oil exports hit by tough new sanctions introduced at the end of the outgoing administration, and the delicate talks within the organisation about compliance to production targets.

And at the back of Opec+ delegates’ minds is President Trump’s call from Davos that the organisation pump more barrels to bring global prices down.

With all those variables it was no surprise that Opec+ decided to stay on track for the April reintroduction of supply, despite the tariff war. 

That gives much-needed time to figure out how the latest Trump bombshell – and any more yet to come – will affect global oil markets.

Frank Kane is Editor-at-Large of AGBI and an award-winning business journalist. He acts as a consultant to the Ministry of Energy of Saudi Arabia