Oil extends drop as Trump’s Mexico tariffs worsen demand worries

Crude oil fell as markets were jittery on the planned tariff imposition on Mexico by the US Administration. (Reuters pic)

SINGAPORE: Oil dropped below US$56 a barrel after President Donald Trump said the US would impose tariffs on all Mexican goods, opening up a new front in the trade war and further damping the demand outlook.

Futures in New York fell as much as 1.6% after Trump announced the 5% levies that will take effect June 10 and could go as high as 25% on Oct, which are aimed at getting Mexico to stop immigrants illegally entering the US. That followed a 3.8% tumble Thursday that was driven by rising US gasoline stockpiles and a smaller-than-expected oil draw from storage facilities, which fueled worries about falling demand in the world’s largest economy.

The Mexico tariffs took markets by surprise, rattling investors already spooked by the worsening US-China trade war and raising the prospect that the White House could impose levies on Europe. The deteriorating demand outlook has put oil on course for its biggest monthly drop since November, despite a tight supply environment and an increasingly tense situation in the Middle East. The conflicting signals have pushed oil volatility to the highest levels this year.

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The tariffs on Mexico are “very negative for global growth” because US levies on Europe now appear more likely, said Stephen Innes, head of trading at SPI Asset Management. “Given oil markets are tethered to the hip of risk markets currently this is bad news for oil bulls.”

West Texas Intermediate crude for July fell 73 cents, or 1.3%, to US$55.86 a barrel on the New York Mercantile Exchange as of 7:45 a.m. in London after dropping as much as 93 cents earlier. The contract is down 4.7% so far this week, taking its drop in May to around 13%.

Brent for July settlement declined 96 cents, or 1.4%, to US$65.91 a barrel on London’s ICE Futures Europe exchange after closing down 3.7% on Thursday. The global benchmark crude was trading at a premium of US$9.97 a barrel to WTI.

The tariffs on Mexico raised the specter of a global trade war and also spurred speculation that an agreement between the US and China may now be harder to reach. In fresh evidence of the toll the dispute is taking, a Chinese manufacturing gauge for May dropped more than forecast. Beijing is mobilising its state-run energy industry to prepare for a long struggle with the US, and also has readied a plan to restrict exports of rare earths, according to people familiar with the matter.

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American oil inventories fell by 282,000 barrels last week, the Energy Information Administration reported. That compared with the median forecast for a 1.36 million barrel decline in a Bloomberg survey. Gasoline stockpiles rose for a second week despite the onset of the summer driving season.

“US inventory draws normally signal market strength,” but there are bigger concerns with the global economy, said John Driscoll, chief strategist at JTD Energy Services Ltd. in Singapore. Trump “seems willing to fight trade wars now on multiple fronts” and this is a genuine worry for global growth and oil demand, he said.

Other oil-market news Saudi King Salman Bin Abdulaziz accused Iran of threatening global oil supplies and shipping at a meeting of Arab leaders that called on the international community to confront Tehran following attacks on shipping. The US State Department sought to quash speculation that the Trump administration is easing its clampdown on Iranian oil exports after a sanctions waiver program ended May 2. Crude futures for July fell 5.6% to 449.3 yuan a barrel on the Shanghai International Energy Exchange