The Crude Report: Trade wars vs the oil market

Tom: Hello, and thank you for joining us for this episode of "The Crude Report: Trade wars versus the oil market." I'm Tom Reed, VP for China Oil Markets, and joining me today is Haik Gugarats, our editor at large, and all-round policy expert in D.C., to discuss what's going on with Trump's trade wars, and what it means for oil markets. Hey, Haik. How are you doing?

Haik: Hi, Tom. Thank you for the kind introduction. And looking forward to talking to you about this excellent and very, very exciting topic.

Tom: Yeah, if you're not too exhausted already. I know you've been practically following every twist and turn. It's been an intense week. It's been a disorientating week, for those of us just trying to cover it and keep up with what's going on. Pity anyone trying to trade it. Could you, if it's remotely possible at this point, explain what tariffs have been imposed, and who they've been imposed on? What's the U.S. done, what's the U.S. doing, what's the EU doing, and what's China doing?

Haik: Yes. Absolutely. And I should actually start by timestamping our discussion, because it is important. We are speaking at 2:30 p.m. Eastern Time, 7:30 p.m. London Time, on April 11th. And the reason I mention this timestamp is, trade policy, under Trump's second administration, is changing frequently, by the minute. President Trump himself likes to take to Truth Social to announce major changes. So, as of the time we are speaking, here's where we stand. With regard to China, there is 145% tariff on all imports coming from China to the United States. For most other countries of the world, the United States is imposing a 10% import tax. And I should also mention here that energy commodities are very explicitly exempted from these tariffs that Trump has imposed most recently last week, but also has been imposing since he took office on January 20th. And in case you wonder why energy got exempted after all...

Tom: Well, yeah. That's an interesting twist, right? Because back in March, the markets were in a panic because the U.S. is about tariff Canadian crude imports and Mexican crude imports. Whoa. Now there's a carve-out?

Haik: Yeah. So, I think, to the degree that this administration can learn lessons from its policies, I think it learned one from that episode. If you remember, Canada and Mexico were the first targets, even at a higher degree than China was. Trump, on March 4th, imposed a 10% tariff on Canadian energy imports, and a 25% tariff on Mexico energy imports, which completely freaked out every chain of the North American energy markets, which are integrated. Those tariffs lasted a total of three days. He removed them on March 7th, has not reimposed them. Canada and Mexico were exempted from the so-called reciprocal tariff that Trump announced on April 2nd. There was a second wave of reciprocal tariffs that was gonna be even higher, that went into effect on April 9th, but he removed them, removed them later that day, because of what happened in stock and financial markets.

Tom: Wow. Yeah, I mean, there's been twists and turns, I think it's fair to say. And of course, during his first presidency, a lot of Trump whisperers insisted that we should take him seriously, but not literally, i.e. he wouldn't really go through with everything that he threatened. And then, as you say, there's been this twisting, turning policy on tariffs since then. On the 2nd of April, massive tariffs on almost all U.S. trading partners, with the apparent aim of eliminating all U.S. trade deficits, including some tariffs on uninhabited islands. On the 4th of April, he said on Truth Social that his policy would never change. On the 9th of April, he paused all reciprocal tariffs for 90 days, but he increased those on China. What's going on here? Did Trump blink? Should we in fact take him literally, but not seriously?

Haik: Yeah. We have had with discussions, and you can read our stories in the last few months. And we have always told our readers, take him seriously and literally, because he has been talking about tariffs for quite some time. He tried to implement some of them in his first administration. He certainly talked about them when he was running again for president last year. Remember, last year, he talked about 60% tariff on China, and 10% to 25% tariff on the rest of the world. So, tariffs are a key part of his agenda. And he talked about them in many different ways, so we took him seriously now.

The reason he can impose these tariffs is he is at the peak of his political power. The Republican Party controls Congress. He is counting on tariff revenue to offset lost income as he implements other parts of his agenda. He wants to extend tax cuts that are expiring at the end of this year. He has promised several other policy changes that are actually going to increase budget deficit if they are not offset. So, tariff revenue, which his administration estimates at $600 billion a year, is a key part of his budgetary process, and a key part of his economic agenda, so this is going to happen. However, reality intervenes, right? I mean, there is no political opposition at the moment that can derail these tariffs, but the markets didn't like them.

Tom: And he backed out?

Haik: Yeah, and he backed out. He actually said so himself. On April 2nd, he introduced the reciprocal tariffs that were going to be as high as 69% for Vietnam, you know, 20% for EU. He rolled them back. So, EU and Vietnam, and every other trading partner is now subject to a mere 10%. And I'm saying "mere" only in relevance to what it could have been, because 10% tariff is still a significant inflation factor, right?

Tom: Mm. And of course, on a trade-weighted basis, they will be higher still, something more in the region of 25% on all goods coming into the U.S.

Haik: Absolutely. They will be.

Tom: I think it's very interesting that he views the deficit in terms purely of manufacturing goods. And if you look at the U.S.'s trade balance in terms of services, with those big tech giants, Meta, Google, etc., those kind of companies, those are not factored into his thinking on the trade balance.

Haik: They are not at all. I mean, if you talk to an economist, and this is probably one area of economics that is generally accepted across most schools of economic thought, there is goods, there is services. There are financial flows involved. I think the focus on goods kind of reflects Trump's personal view and the view of his closest economic advisors. And I think that explains, A, the initial disregard for consequences, but also, when those consequences became real, a major sell-off, specifically in bond markets, that Trump referenced on April 9th, I think that's pretty much the only break on Trump's trade policy. And he said...

Tom: I'm seeing curious echoes with the way that Xi Jinping, China's president, also thinks about economics. I mean, he too thinks of them in terms, primarily, I would say, of manufactured goods and manufacturing prowess.

Haik: That is... I don't wanna call it outdated, because obviously, countries are in different part of their cycle. But from the United States' perspective, it has been, just like any other advanced economy in the West, it has been primarily a services-led economy, for quite some time. So, if you add services to goods, the trade balance looks very differently. But yeah, I mean, manufacturing is an obsession. And manufacturing is an obsession, again, in context of what the White House presents as with global competition with China. It is a justification. We need to have a new defense industry. We need to have shipbuilding in the United States and so forth. But yes, this is a big focus on goods, on physical products.

Tom: But in the quest to re-industrialize the American heartlands, by jacking up the cost of imports, of course, the United States is facing some quite considerable inflationary pressures and economic pain that may even extend beyond what its trade partners, who are not pursuing similarly isolationist policies, might expect. So, how unified is the Republican Party and the U.S. electorate behind what he's doing? We've seen him blink once. Might we see him blink again?

Haik: I think the market reaction is key here. In terms of political power, I wanna mention it again, I think Trump is at the peak of his political power. He controls Congress, both chambers, the House of Representatives and the Senate. He's trying to push through what he calls one beautiful bill, meaning a bill to unify all elements of his economic agenda, tax cuts, deregulation, you name it. And tariffs are a crucial part of it. So I think, even as many Republicans don't like tariffs, especially those in the Senate, they will not oppose them. In fact, the House, this week, even passed a measure that prohibits any resolution opposing Trump's tariffs. I mean, it's quite incredible, but there is little that Congress can do at the moment. Now, inflation is not showing up yet. The latest report for March, that came out this week, actually suggests consumer prices growth has slowed in March. So, but we know that...

Tom: And those were the reports before the tariffs came into effect.

Haik: Exactly. We know our colleagues, on market teams here in the United States, when we talk to their sources, some of them are already seeing this. Of course, for steel, tariffs have kicked in on March 12th. So, Trump has imposed separately from everything else. He imposed tariffs on steel and aluminum at 25%. Those kicked in March 12th. Separately, there is a tariff on imported cars, 25%. That kicked in April 3rd. Auto parts will be taxed at 25% beginning May 3rd. So, as these tariffs kick in, the inflationary impacts are pretty much immediate because we are all, you know, just-in-time manufacturing process has taken hold in the United States. I think when we see, if we see higher inflation, as the Federal Reserve and pretty much every economist is predicting, it may be a different political picture, given that there are midterm congressional elections in November 2026. And yes, it's only 18, 19 months away, but the political election cycle starts much earlier.

Tom: And what is bad for inflation, what is pushing up inflation, is bad for growth, as a general rule, and what is bad for growth is bad for oil prices. And we are already starting to see this filter through into the price of oil, which is down by about $10 a barrel from the start of the month. Massive drop in oil prices. We've seen a number of banks slashing their oil demand forecasts for this year. I think Goldman Sachs has halved theirs. Yeah, I think maybe this is the moment where we turn to exactly what this means for the oil market.

Haik: Yeah, I also wanna know what it means for China.

Tom: Yeah. Okay. Well, let's tackle China first.

Haik: Because China is [crosstalk 00:14:41] as well, didn't it?

Tom: Let's tackle China first. Yes. What does it mean for China? Nothing good. Because, of course, this is an economy that has predicated a lot of this year's GDP growth target on exports of manufactured goods. And Trump is very much hitting China where it hurts. So far, the mood has been quite defiant. And I think this is a kind of interesting thing. I think, in a peculiar way, what the U.S. is doing is actually engendering quite a lot of support outside the U.S. for China. A lot of people weren't maybe happy with Chinese trade practices, but they are also deeply unhappy with U.S. economic policy. And so, yeah, I think a lot of people now in China are kind of rallying around the flag.

Haik: For crude and LNG, the impacts are probably not significant, right? I don't think from the U.S. perspective, the share of China was great in those exports. But LPG might be different.

Tom: LPG, as you point out, is different. And of course, as you also mentioned, China's imposed its own reciprocal tariffs in response to the U.S. ones. They kind of match them blow for blow. Although they did actually say in their latest communique they were gonna stop doing that because these tariffs are now so high that they have become meaningless. All trade between the two countries is essentially going to halt. What that means for LPG is, I think, quite serious for China, because China is a major importer of U.S. LPG, in particular propane. Takes about 600,000 barrels a day. That goes both to feed China's steam crackers, producing ethylene, and into its propane dehydrogenation plants to produce propylene. What, in particular, those propane dehydrogenation plants run on, now they can no longer access U.S. LPG, is, I think, a major question for China's petrochemical manufacturing base. What are they gonna do? Swap it out for higher-cost propane from the Middle East or something like that? Are they going to switch to cracking naphtha? If so, they're gonna have to process more crude. But, you know, they're not gonna make that up downstream, because their margins will be that much weaker. So I think it's likely that China's production of plastics is gonna take something of a body blow on this basis.

Haik: So, it's kind of a self-harming move, just as much as U.S. tariffs are a self-harming move.

Tom: Yeah. I mean, and I have to say, I did not see this coming. I was like, why would... I mean, just because, was it Paul Krugman saying just because someone else has a rocky shoreline, do you fill your own harbor with rocks? It seems a curiously self-defeating move. But I think political prestige probably plays a part in this. And so far, of course, the U.S. has been, sort of through back channels, suggesting possibly a meeting, a summit between Xi Jinping and President Trump might be a good idea. But so far, there's been a deafening silence from the Chinese, and they do not want to come to the table as supplicants. They very much want to be seen as a peer, and so far, they've resisted the idea of a summit.

Haik: Yeah. That's... One bright light, if you wanna say, in the entirety of very bleak bilateral relations, Trump keeps saying, "Oh, Xi Jinping is my friend. They should reach out. They don't know how to reach out to us." This is an incredible turn of phrase from the White House. But there is always this talk of a grand deal, and I don't know if it's more of a market-calming exercise or a sincere belief. But be as it may, as you point out, what's fair to talk about.

Tom: Quite.

Haik: Of course, it...

Tom: And, you know, I think the political stakes for the Chinese administration are very, very high. And not least because they're dealing with a man who's highly unpredictable and highly changeable, and, you know, as we've discussed extensively, turns on a dime in a matter of days on major economic policies. If Xi Jinping were to take a meeting, a summit with Donald Trump, all smiles, a bland readout, expressing a desire for win-win outcomes, only to have the U.S. turn around and increase tariffs or do something else, there would be an enormous political blowback for Xi Jinping, enormous loss of face. So I think there's a high degree of skepticism about the benefits of agreeing to that sort of summit. But the question is, how does China respond? They've increased tariffs. There's not gonna be a lot of trade happening at this point. And, in addition, of course, to cutting off their own nose to spite their face by tariffing LPG imports, they are, of course, also gonna be hitting America, hitting Trump, in the red states, where it hurts, in terms of stopping, halting agricultural commodity imports from places like Texas, Louisiana, places like that, California. So, there is some targeting in the Chinese response.

Haik: So, I mean, U.S.-China is complicated enough, and the tariff wars are terrifying for oil market. And of course, this was also the period when OPEC decided to add more oil to global markets. So, what's the overall picture? What's happening in global markets, given all of this?

Tom: Well, yeah, I mean, it's a really, really tough market for OPEC, because they already wrong-footed the market once. I think people had not expected them to push ahead with the output cuts that they've said they're going to. Then they tried to calm those concerns about oversupply by saying they were simultaneously going to enforce compensatory cuts on serial overproducers, like Iraq and Kazakhstan. That's a really interesting one to watch, of course, because earlier this month, there were suggestions that Kazakh exports would fall quite steeply because of loading problems with the CPC terminal.

Those appear to have been resolved, Kazakh supply uninterrupted, buying continues. That suggests really that there's not a lot of compensatory cutting going on by OPEC, which is gonna put further pressure on oil prices. We're certainly seeing that in the flat price. That's come down by about $10 in the last month. Backwardation, the premium of prompt to forward crude contract pricing, which indicates the relative tightness of the market, that's come down. We've seen a lot of spot market differentials come down. Now we're looking at a very, very weak oil market environment, I think. It's going to probably hit different products in different ways, but yeah, in terms of crude, it's gonna be a really interesting OPEC meeting, the next one.

Haik: Of course, trade is not the only issue between the United States and China. Far from it. Trump, separately, has been combining diplomatic outreach to Tehran with measures to squeeze Iranian crude exports to China. For the first time, his administration imposed tariffs on two teapot refiners in China, one this week. How is that affecting Chinese markets?

Tom: Right. Yeah. So, this was kind of unexpected. The Biden administration sanctioned a lot of ships carrying Iranian crude. The Trump administration, late last month, sanctioned an independent refiner for the first time. And this, I think, has actually upset the independent refiners in China, which are really the only outlet for Iranian crude, more than was expected. I think we had maybe downplayed their exposure to the U.S. dollar ecosystem to a greater extent than maybe was the case. I think there are concerns now, in Shandong, where these little teapot refiners buy all this Iranian crude, that the U.S. will sanction more of them. And so, you know, they've cut purchases of Iranian crude, which I guess is kind of the U.S. goal insofar as one can be determined. And that has had a very strange, and unanticipated, even by me, Haik, outcome. As the China guy, I should have seen this. I did not see this. Because these teapots, they are the marginal source of supply of refined product to the domestic market. Their inability to access the same quantity of feedstock means that they are cutting runs. That has pushed up the price of refined products, and so refining margins in China right now, despite all these horror stories about the outlook for the global economy, are really quite strong. That was not something that we expected.

Haik: I think sanctions practitioners here in Washington will be very surprised, maybe unpleasantly surprised, to learn that refining margins in China matter more for sanctions enforcement than anything that OFAC or any other U.S. government agency can do, so... But that's the law of unintended consequences.

Tom: That is. Well, I think that's gonna be the message of this podcast, right? It's the law of unintended consequences. Be careful what you wish for.

Haik: Well, right now, we are approaching 3 p.m. Eastern Time on Friday, April the 11th. And I just checked the Truth Social. There have been no changes in the tariff posture that would have forced us to record this again, so...

Tom: Oh, thank heavens.

Haik: ...that is good news.

Tom: That's fantastic. Thank you so much. That was a great chat. And thank everybody for dialing in. If you would like to hear more about our products and services, then please check out argusmedia.com. And in the meantime, have a great day. Thank you very much.