The talk of the market has been Trump’s tariff announcement on imports from Canada, Mexico, and China. This week, we expect price action in Brent crude futures to remain rangebound between $75 and $79/bbl in the Apr’25 contract as the market struggles for direction in light of recent headlines. We think the key factors for this week in the oil markets are as follows:
- The US imposing tariffs on Canada, Mexico, and China
- US Dollar reaction
- OPEC’s JMMC meeting
Over the weekend, Trump imposed 25% tariffs on imports from Canada and Mexico, including a lower 10% tariff on Canadian energy and a 10% additional tariff on China. The resulting price distortion will likely widen the differential between Western Canadian Select (WCS) and WTI crudes, with WCS discounted to clear into the US. Canada accounts for 60% of US oil imports. In the absence of volumetric changes to supply, the higher feedstock costs for US refiners will either be absorbed through lower margins or passed on to end users for refined products. Alternatively, assuming reasonable freight and transportation costs, US refiners could turn to Latin America to partially substitute for Canadian and Mexican crudes. While the increment tariffs on China may raise demand concerns, considering its lagging economy, we think the short-term impact on Brent crude is price neutral as we do not expect a supply disruption.
The dollar surged following the tariff announcements, with the dollar index rising by over 1% on Monday. The Canadian dollar reached its lowest level since 2003, while the Mexican peso fell to its lowest in almost three years. A higher dollar is a headwind for dollar-denominated assets like oil. However, depreciating currencies against the dollar may help partially offset the increased costs for US refiners. Later this week, the market will closely watch the US non-farm payrolls (NFP) data, given its implications for Fed policy and the dollar. Recently, the Fed has indicated that it is in no rush to lower rates in the near term amid the uncertainty stemming from Trump’s economic policies. Hence, a higher-than-expected NFP reading will provide a continued headwind to oil prices, reinforcing dollar strength and supporting the ‘higher-for-longer’ outlook.
Finally, OPEC’s JMMC meeting today will be widely followed, where its members will discuss the market condition, and group compliance will be reviewed. There will likely be no recommendations for policy changes, where voluntary cuts will remain in place until the end of Q1. The discussions will take place against the backdrop of a Trump presidency, who has called on “Saudi Arabia and OPEC to bring down the cost of oil” at Davos. We expect that the JMMC’s official communique will emphasise the usual rhetoric around compliance with production targets and market conditions and will not include any reference to President Trump’s call for a lower oil price.
