World Awakens To Escalating Trade War

It’s a relatively quiet start for energy markets Tuesday as the world awakens to an escalating trade war and debates the impact on both supply and demand. Oil prices are trying to lead the energy complex lower, touching their lowest value since Christmas, while ULSD futures are ticking modestly higher and RBOB hovers near breakeven.

There was no 11th hour deal to this time around and 10% tariffs on Canadian energy imports and 25% tariffs on most other goods apparently are starting today. Canada hit back immediately, announcing tariffs on billions of U.S. imports, while Mexico’s response is expected in the next couple of days. The market reaction so far is less severe than what we saw in early February as shippers had 4 weeks to game plan how they’d side step the tariffs, but rack prices across New England saw double digit increases overnight as there’s simply no simple replacement for the products shipped from Irving Oil’s refinery that’s the primary supply point for multiple terminals in the area.

Western Canadian Select crude oil is offered around $56/barrel this morning, roughly $11.5 below WTI. How that spread reacts in the coming days will signal how much of the 10% tariff is being absorbed by Canadian producers vs the U.S. refineries that depend heavily on those discounted heavy/sour barrels. Roughly 60% of all US oil imports come from Canada so there’s no way to replace them short term, but a $5.5/barrel swing to cover the tariff doesn’t seem like it will be impossible to handle by either side.

Futures sold off heavily Monday following a press release from OPEC & Friends announcing that they were sticking with their plan to begin relaxing their voluntary output cuts April 1. There had been several reports that the cartel would continue delaying the return of those barrels to the market given the relatively weak prices and ample global supplies, but the press release claimed that “healthy market fundamentals….and outlook” allowed them to proceed with a “gradual and flexible return of the 2.2 million barrels/day” in voluntary reductions.

Severe weather is sweeping across the southern half of the country today, with tornadoes in the forecast and numerous power outages already reported. There have not yet been any refinery disruptions reported, but they’re certainly possible in the next 24 hours, with high wind and tornado warning stretching across refinery row along the Gulf Coast.

Valero reported a fire in a crude unit at their Corpus Christi refinery over the weekend but no injuries were reported. The flaring that resulted from the event lasted two hours. The Corpus Christi refineries have been struggling lately with numerous reports to the TCEQ so far this year from both planned and unplanned maintenance events. Those refinery hiccups combined with strong export demand has led to tight supplies at terminals across the region.