The US Tariff Own Goal: OPEC's Unexpected Victory
Yesterday, OPEC+ postponed plans to increase oil production, citing weaker-than-expected demand and rising output from non-OPEC countries. This cautious decision highlights the cartel’s focus on stabilising global supply and prices. However, this fragile balance faces a looming threat: a proposed 25% tariff on Canadian and Mexican oil imports. Such a policy could disrupt trade flows and reverberate across the U.S. refining sector and the broader energy market.
Canada and Mexico supply the heavy crude that U.S. refineries are designed to process. The lighter crude from U.S. shale fields, despite its abundance, cannot replace these imports without costly refinery upgrades. A 25% tariff would make Canadian and Mexican oil economically unviable, forcing refiners to seek alternatives. This shortfall positions OPEC, with its reserves of heavy crude and spare production capacity, to step in and fill the gap.
OPEC’s ability to swiftly adjust output offers a strategic opportunity. By supplying the U.S. market, the cartel could expand its market share and deepen its influence. However, a measured production increase might stabilise prices, inadvertently supporting U.S. shale producers, whose break-even costs remain above $60 per barrel. Keeping prices at this level would help shale remain competitive, undermining OPEC’s efforts to dominate.
A more aggressive strategy would involve ramping up production to drive prices below $60. This move could undermine the profitability of U.S. shale while weakening Canadian and Mexican exports already burdened by tariffs. By leveraging its low production costs, OPEC could consolidate its dominance and increase revenue through higher volumes, despite lower prices.
For U.S. refiners, the scenario offers short-term relief from lower input costs but raises longer-term concerns. Greater reliance on OPEC would undermine energy independence and increase exposure to geopolitical risks. Meanwhile, the broader market could experience heightened volatility, disrupted trade flows, and reduced investment in new production capacity.
Tariffs on imports from Canada and Mexico may appear narrowly targeted, but their consequences could ripple through the global economy in ways markets have yet to fully grasp. While many expect tariffs to stoke inflation, we believe the opposite is more likely. Weaker global growth, disrupted trade flows, and a potential flood of oil from OPEC could exert downward pressure on energy costs, dragging inflation lower rather than higher. This dynamic may prompt the Federal Reserve to act faster than markets currently anticipate, easing monetary policy in response to softer price pressures and weakening demand. In an interconnected global economy, knee jerk assumptions about inflation risk oversimplifying the complexities at play. Measures intended to protect domestic industries could, paradoxically, accelerate a global slowdown, reshaping expectations for growth, inflation, and the trajectory of U.S. interest rates.
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