Oil futures on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange extended losses in early Tuesday trading, with the U.S. West Texas Intermediate benchmark trading near four-month lows, as investors raise concerns over aggressive U.S. trade policies.
WTI, Brent were off to a bad start of a new trading week after the Trump administration threatened to slap tariffs on Mexico over immigration disagreements. The White House announced last week it would slap a progressive 5% tariff on Mexico, with an option of a 5 percentage points increase each month until October, if the country doesn’t stop the flow of illegal migrants into the United States. While Mexico has not responded with retaliatory measures, the country’s top diplomats on Monday rejected an idea of granting asylum status for Central American refugees in Mexico.
The Wall Street Journal reported that Trump’s tariffs could hit as much as $360 billion in traded goods and would represent the biggest imposition to date of such duties on a U.S. trading partner. Moreover, Trump’s tariffs will cover sectors not previously involved in the trade war, including crude oil and petroleum products. U.S. – Mexico energy trade accounts for nearly 12% of the total trade between the two countries. U.S. business groups and lawmakers already expressed opposition to the plan, pointing to rising costs for U.S. consumers and diminished corporate profits. Reportedly, the announcement caught many in the White House by surprise, while Trump’s top economic advisor Robert Lighthizer opposed the plan. Oxford Economics estimates U.S. GDP set to decline 0.7% in 2020 if Trump’s tariffs on Mexico are carried out to completion this fall.
Investors grew increasingly concerned that U.S. trade policy is used as a tool to gain leverage outside of economic sphere. “It is setting a dangerous precedent, which leave markets wondering what else the tariffs could be used for” said Kristina Hooper, a chief global strategist at Invesco.
Markets were already unnerved by the U.S., China trade war escalation after the Trump administration said it would consider import levies on an additional $300 billion in Chinese goods. Meanwhile, China raised the stakes last week by announcing it would stop all purchases of U.S. soybeans and threatened to cut off exports of rare-earth materials to the United States. China’s officials said the deadlock over trade between the United States and China is unlikely to end anytime soon as it “would be very difficult for the U.S. side to form a powerful and systematic correction of the current policy course”.
Goldman Sachs said on Sunday that "escalating trade wars and weaker activity indicators have finally caught up with oil market sentiment".
Oil futures dropped almost 20% in May, erasing most of the gains from the beginning of the year. "The magnitude and velocity of the move lower were further exacerbated by growing concerns over strong US production growth and rising inventories," Goldman said.
Preliminary data on U.S. crude stockpiles for the week ended May 31 is due for release by American Petroleum Institute on Tuesday 4.30 PM, while official statistics from Energy Information Administration will be published Wednesday mid-morning.
By Liubov Georges for Oilprice.com
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Liubov Georges has graduated NYU with Master's Degree in Energy Policy and Economics. Currently, she is an energy analyst at DTN Oil&Gas