Tariffs Imposed and Prices are…Up

Oil markets are rising in spite of tariffs imposed on China by President Trump last night – a move widely expected by the market. As oil prices rise, it appears international crude (represented by Brent blend crude) is gaining a further advantage, with the Brent-WTI spread rising to $9.17. That spread will continue promoting exports from the US to other nations – if we can get our crude out of West Texas, where producers have been stifled this year by lack of pipeline capacity. WTI crude is currently trading at $69.95, a gain of $1.04.

Fuel prices are moving higher in conjunction with crude, after two trading sessions of moving inversely to crude. Diesel is trading at $2.2399, picking up 3.4 cents. Gasoline prices are $2.0070, gaining 3.0 cents.

In oil market news, markets are gaining some enthusiasm from Saudi Arabia’s oil minster’s comment that the Saudis would let oil prices rise above $80 in the short-term given supply tightness in Iran and Venezuela. The comment implies that Saudi Arabia will not act as the swing producer in the short-term, allowing prices to rise as global supplies shrink. Russia, on the other hand, commented that $70-$80 for Brent crude is an ideal range given the current shortage, and that long-term oil will stabilize at $50/bbl – a bold statement considering investment bank price targets generally show crude remaining around $70-$80, or perhaps higher, in 2019 and 2020.

Let’s Talk Tariffs

Of course markets can’t stop focusing on the tariffs Trump just imposed – but why would tariffs, which reduce economic growth and oil demand, cause prices to rise? Markets had been expecting a 25% tariff imposed on Chinese goods, but Trump’s proposal sets targets at 10% initially, rising to 25% over the next year if China does not reach a trade deal with the US.

While many questioned Trump’s tactics at the beginning of the US-China trade rift, it’s becoming increasingly likely that Trump is truly working towards a more economically beneficial trade policy, for a number of reasons:

1. He’s negotiated other trade deals with Mexico and Canada, as well as the EU. These demonstrate that Trump is not anti-trade as some believed, but rather working towards deals more advantageous for the US.
2. He’s imposing sanctions slowly, giving China time to respond before the full penalties apply.
3. China is beginning to sweat. The US imports 4x more than they export to China, giving us far more leverage in negotiations to escalate tariffs. Domestic pressure on Chinese diplomats is mounting, given the importance of trade to the Chinese economy. Once China retaliates to the latest volley, they will be “out of bullets” as Commerce Secretary Ross pointed out this morning. Of course, China could retaliate through non-trade measures (such as dumping its share of US debt) – but those options are more comparable to a financial nuclear option that likely won’t be used.

So what products will become more expense for American consumers? The new round of tariffs means that all goods except roughly 300 products will be subject to tariffs. Apples users can breathe a sigh of relief – tariffs won’t impact their precious Smart Watches and some other Bluetooth electronics. Tariffs also exclude certain consumer safety products like bike helmets.

Notably for oil markets, China doesn’t appear to be moving towards imposing sanctions on US oil. If they did, it would cut off a major demand source for US crude, causing prices to decline.

Storm Update

Although Florence has now dissipated and Isaac is largely expected to dissipate as well, the Carolinas are still facing a significant amount of flooding – and the worst may be yet to come. As water makes its way down streams towards the coast, it will simply move the flooding to new areas. Experts expect flooding in certain areas to last until the end of September of longer.

Fuel supplies throughout the Carolinas and Virginia has generally normalized, though carrier capacity remains a concern. Due to flooding in some areas, deliveries take longer to make, stretching local capacity thin.  Mansfield remains on Code Red for North Carolina, South Carolina, and Virginia due to flooding.