Oil prices could fall after Trump tariffs spark initial energy price spike

Oil prices are likely to fall in the longer run after the initial jump following President Donald Trump’s implementation of hefty tariffs on Canada, Mexico and China, said industry watchers. 

Over the weekend, Trump followed through on his long-threatened 25% tariffs on imports from Canada and Mexico, as well as a 10% duty on goods from China. Energy resources from Canada will be subject to a lower 10% tariff.

The U.S. West Texas Intermediate rose 1.75% to $73.8 per barrel, while U.S. gasoline futures also climbed. RBOB Gasoline futures were last up 2.81% at $2.11 per gallon. International Brent crude climbed 0.71% to $76.21 per barrel.

According to the latest data from the U.S. Energy Information Administration, America’s imports of Canadian crude oil reached a record 4.3 million barrels per day in July 2024, following the expansion of Canada’s Trans Mountain pipeline. Canada made up about 62% of all U.S. crude oil imports in the first 10 months of last year, while Mexico accounted for about 7% in the same period.

While crude markets will see higher prices and consumers will be forking out more for gasoline and diesel costs in the near term, the spike is only temporary, oil watchers told CNBC. 

“While the initial move on crude oil is upward, a cycle of tariffs and retaliatory actions by Canada, Mexico, China and perhaps others in the future could lead to a worldwide recession, causing oil prices to plummet,” Andy Lipow, President of Lipow Oil Associates told CNBC.

The tariffs have not resulted in any oil supplies being taken off the market, and will result in a redistribution of supplies as Mexico and Canada look to divert their volumes to Europe and Asia, Lipow added. Meanwhile, U.S. refiners will be looking to process more domestic crude oil while seeking Middle East alternatives.

Both Canada and Mexico have limited spare refining capacity or alternative export routes, and the tariffs will likely push oil producers in both countries into steep price discounts, said Saul Kavonic, head of energy research at MST Marquee.

Canadian oil producers will eventually bear the brunt of the tariffs’ burden with a $3 to $4 per barrel discount on Canadian crude given the limited alternative export markets, Goldman Sachs wrote in a note dated Sunday. 

In the medium term, Goldman’s analysts also expect that broad tariffs will impact global GDP as well as oil demand, weighing down oil prices.

Additionally, global oil prices could drop further after the next quarter as tariffs worsen the demand picture and OPEC+ faces increasing pressure from Trump to reverse production cuts, said Kavonic. Trump recently stated that he is urging Saudi Arabia and OPEC to lower oil prices.

The oil cartel, which is slated to meet on Monday, has yet to respond to Trump’s request. OPEC+ has been withholding 2.2 million barrels per day from the global market to stem falling prices. In December, the group decided to extend its production cuts through at least March 2025 before phasing them out gradually over the course of a year.