Goldman Sachs has projected that a proposed 10% tariff on U.S. oil imports could result in a $10 billion annual loss for foreign producers, particularly those from Canada and Latin America. These countries, reliant on U.S. refiners due to limited alternative markets, would bear the brunt of the tariff. U.S. President Donald Trump’s plan to impose a 25% tariff on Mexican crude and a 10% levy on Canadian crude, set to begin in March, has raised significant concerns. Despite this, Goldman Sachs suggests that the U.S. will continue to be the primary destination for heavy crude, citing its advanced refining capabilities and relatively low costs.
However, the financial impact on U.S. consumers could be substantial, with Goldman predicting a rise in prices. The estimated cost to American consumers would reach $22 billion annually, while the U.S. government would generate $20 billion in revenue from the tariffs.
In a parallel move, China recently retaliated against U.S. tariffs by imposing its own trade measures, marking the beginning of yet another trade war between the world’s largest economies. Last week, China announced a 15% tariff on coal and liquefied natural gas (LNG) products, as well as a 10% tariff on crude oil, agricultural machinery, and large-engine cars. These tariffs came into effect on February 10, following the imposition of a sweeping levy on Chinese imports by the U.S.
Standard Chartered analysts have analyzed the potential impact of these tariffs on the U.S. energy sector. They highlighted that China initially imposed a 10% tariff on U.S. LNG imports in September 2018, which was raised to 25% in June 2019. Despite the increase, some imports continued under the lower tariff rate. By February 2020, China granted waivers for LNG tariffs, and by April of that year, U.S. LNG cargoes resumed. Over the next 59 months, cargoes have been shipped in all but three months, and long-term contracts between U.S. producers and Chinese buyers have deepened.
However, Standard Chartered suggests that the latest tariffs on LNG will have a limited effect. Currently, the U.S. supplies less than 6% of China’s LNG imports, while China represents only 6% of U.S. LNG exports. With Europe’s demand for U.S. LNG remaining robust, analysts predict that displaced LNG flows will likely not cause significant distress. The main risk lies in the future economics of long-term contracts, some of which involve up to 15 million tonnes per annum (mtpa) of LNG.
Oil Prices Unchanged Amid Ukraine Peace Talks
Oil prices remained largely stable on Monday as markets awaited developments in the ongoing peace talks between the U.S. and Russia regarding the war in Ukraine. Additionally, the possibility of resumed crude exports from northern Iraq has kept traders cautious. By 12:15 p.m. ET, Brent crude for April delivery had increased by 0.4% to $74.76 per barrel, while WTI crude for March delivery gained 0.6%, trading at $70.77 per barrel.
U.S. President Donald Trump initiated discussions with Russia, excluding Ukraine and the European Union from the table. Russian and U.S. officials are scheduled for further talks this week. Ukrainian President Volodymyr Zelenskyy indicated on Sunday that he was willing to step down if it would bring peace to Ukraine.
A potential ceasefire in the Russia-Ukraine war could put downward pressure on oil prices, especially if Trump pushes for the removal of sanctions on the Russian energy sector. Tyler Richey, co-editor of Sevens Report Research, noted that geopolitical stability could also dampen the “fear bid” currently influencing the oil market. The Biden administration’s recent sanctions have significantly increased the number of Russian crude oil tankers targeted, affecting roughly 900,000 barrels per day (bpd). Although Russia is likely to continue circumventing sanctions through shadow fleet tankers and ship-to-ship transfers, Standard Chartered predicts a displacement of 500,000 bpd over the next six months.
The selloff in oil prices had already begun prior to Trump’s involvement in Ukraine talks, driven by rising U.S. crude stockpiles and hawkish comments from Federal Reserve Chair Jerome Powell. Powell suggested that the Fed would not rush to cut interest rates unless inflation decreases or the job market weakens. Higher interest rates tend to reduce oil demand by increasing the cost of borrowing, which can slow down economic activity. The U.S. consumer price index (CPI) showed a 0.5% increase in January, up from 0.4% in December, indicating persistent inflation concerns. The CPI rose 3.0% in the 12 months through January, up from 2.9% in December.