With Mexico Tariffs, Trump Goes A Step Further In Killing Oil Rally

While he’s still doubling down on Venezuelan sanctions, the president’s more conciliatory move towards Iran lately and increasingly belligerent tone on trade with China have been a double dose of pain for both oil-producing countries and proponents of the long game in crude, who lose each time prices fall. And both the U.S. West Texas Intermediate and U.K. Brent benchmarks are set for losses of 10% or more in May, their worst drop since November, due in no small part to Trump’s actions.

With his decision on Thursday to impose a 5% tariff on all imported goods from Mexico beginning on June 10, and “gradually increase” that tax to 25% until the flow of undocumented immigrants across the border stops, the Commander-in-Chief of the United States has strengthened the notion of himself as a gift that never stops giving for oil bears.

There’s good reason why many would have such a feeling, regardless of Trump’s nationalistic tendencies. Benchmark U.S. bond yields touched fresh lows and curves inverted in a warning of recession on Friday after the president’s latest assault on Mexico, which analysts say has the effect of “torpedoing” the U.S.-Mexico-Canada trade deal that he fought so hard to sign last year as replacement to the North American Free Trade Area agreement.

A global recession can never be good for oil, the commodity that literally moves the world. To make matters worse, China’s PMI Index, a super-important factory gauge, slumped more than expected on Friday. China, on its part, is ready to squeeze exports of precious rare earth minerals, used in everything from cellphones to military equipment, so that the U.S. will “feel” some of its pain.

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Besides trade spats with China and Mexico, the Trump administration has also removed India—another giant economy with more than a billion consumers—from the U.S. Generalized System of Preferences, which gives favorable access to goods from developing countries. That decision is a “done deal”, which Washington says it won’t reconsider, despite its wish to do more business with the government of Narendra Modi, who was reelected this month as India’s Prime Minister in a landslide victory.

But back to oil. Trump’s striking at a market that’s surprisingly having one of its weakest pre-summer demand periods. This is a time of the year that’s usually very good for consumption of gasoline and oil prices overall. For a third week in a row, the U.S. government issued a bearish dataset on oil on Thursday. While there was a crude drawdown of nearly 300,000 barrels this time versus unexpected builds of 5.0 million barrels in the two previous weeks, the drop was just a third of the level expected.

Refining margins for gasoline running at about 30% below levels from a year ago has been identified as one reason for the lackluster crude draw among refiners in the run-up to this summer. On a larger scale though, Trump’s antagonistic ways with countries that were once the best trading allies of the U.S. is slowly and surely killing the oil rally, say long-time watchers of the trade. “Trump's Mexico Tariffs Shows ‘No Country Is Safe’,” Bloomberg said in a Thursday headline about gold, which could have very well been written for oil. Sure, WTI and Brent are still up about 20% or more on the year. But there’s no telling where the market could be by the end of June if this bearish sentiment keeps up.

The bottomline is this: Trump loves cheap oil and that’s no secret. We at Investing.com believe that few things matter more to the president than keeping crude prices—and by extension of that, fuel prices at U.S. pumps—as low as possible until his bid for reelection in November 2020. That’s a long way to go, but he’s going to try—that’s our conviction.

The trouble for oil producers and market bulls is that Trump is using the cover of national interest via multiple trade conflicts to get that cheap oil.

John Kilduff, who as founding partner of New York energy hedge fund Again Capital has been both commentator and trader on this market for more than two decades, summed it up succinctly:

“Trump is basically using the office of the President of the United States to launch various unilateral actions to get what he wants.”

You can argue that it’s morally wrong. But by law, he’s acting in the legitimate interest of getting America the ‘best deal’, whatever that’s supposed to mean.

Most interestingly, he hasn’t sent out a single tweet about oil for weeks now while carrying out all these, so you can’t even accuse him of intentionally suppressing the market. He and his supporters will likely react with scorn if such charges are made, saying his greater efforts are being belittled. Or he might just shrug and say it’s all a coincidence, but a ‘good one’ nevertheless, since he’s been on record saying that high oil prices aren’t good for the world.

Oil bulls have no choice but to grit their teeth and see how far he goes.”

Written By: Investing.com