Oil prices surged higher yesterday, with ICE Brent up more than 3.5% and settling at the highest level in over a month. This was after President Trump confirmed that he’s giving Russia 10 days to come to a truce with Ukraine. Failing to reach a deal risks additional sanctions on Russia and secondary tariffs on countries importing its oil. As we’ve mentioned previously, Russia exports more than 7m b/d of crude oil and refined products. Thus, effective 100% secondary tariffs would lead to a dramatic shift in the oil market. A number of key buyers of Russian oil would likely be reluctant to continue purchases, particularly large US trading partners. The impact on the oil balance and prices would be significant. While this gives OPEC+ room to start unwinding additional tranches of supply cuts, it would still leave the market in deficit under a worst-case scenario. It would reduce spare production capacity, leaving the market more vulnerable to supply shocks. In addition, any meaningful supply increases from the US would take time to come to the market.
The potential impact of secondary tariffs on oil prices has us questioning whether Trump will actually follow through on such threats, at least at a 100% level. This would be a shock to the system. A significantly lower tariff level, which gradually increases over time, would be more manageable for the market.
Numbers overnight from the American Petroleum Institute show that US crude oil inventories rose by 1.5m barrels over the last week. Stocks at the WTI delivery hub, Cushing, also increased by 500k barrels. Meanwhile, for refined products, gasoline stocks declined by 1.7m barrels. Distillate stocks increased by 4.2m barrels, helping to ease some of the concerns over tightness in the middle distillates market.