ICE Brent settled a little more than 1.6% lower yesterday, taking prices back below US$70/bbl, despite President Trump’s “major statement” on Russia. Trump threatened to impose secondary tariffs of 100% on Russia if President Putin didn’t make a deal within 50 days to end the war in Ukraine. The lack of any immediate action and the belief that these threats won’t be carried out help to explain the market reaction.
However, if Trump does follow through, and the tariff is implemented effectively, it would drastically change the outlook for the oil market. Russia exports more than 7m b/d of crude oil and refined products. China, India and Turkey are the largest buyers of Russian crude oil. They would need to weigh the benefits of buying discounted Russian crude oil against the cost of their exports to the US facing prohibitively high tariffs. If effectively enforced, the global market would be pushed into a large deficit. OPEC’s spare production capacity would not be able to fill the entire shortfall. This would present significant upside to oil prices. Given Trump’s desire for low oil prices, we don’t believe Trump would be keen to follow through with this threat.
Trade data from China for June showed a rebound in crude oil imports. Crude oil flows increased by a little more than 7% year on year to 12.2m b/d, which was also up more than 10% month on month. This leaves cumulative imports so far this year 1.4% higher YoY. The stronger imports in June were likely a result of more refineries returning to operation following spring maintenance.
OPEC will release its latest monthly oil market report later today. Last week, the International Energy Agency’s (IEA) revised lower its demand growth estimates for this year. OPEC has held a more bullish demand outlook. So, it will be interesting to see if the group makes any downward revisions.