Reasons Behind the Sharp Decline in Oil Prices Following Trump’s Tariffs

Key Takeaways

Crude oil futures plummeted to near their lowest levels in years on Wednesday due to concerns over U.S. tariffs and an unexpected output increase from OPEC+.

West Texas Intermediate (WTI) crude futures, the U.S. oil benchmark, dropped by as much as 4% to $65.22, reaching its lowest price since late 2021. This decline also led to a drop in shares of U.S. oil companies like ConocoPhillips (COP) and ExxonMobil (XOM).

The oil markets were unsettled by President Trump’s recent actions, which included a 25% tariff on Canadian and Mexican goods, along with doubling tariffs on Chinese imports to 20%.

The Impact of Trump’s Tariffs on Oil Prices

The Finance Avenue reported that when Trump initially threatened tariffs on Canadian and Mexican imports in January, oil prices surged due to concerns about potential supply limitations. Now, with renewed threats of tariffs, market participants are worried about the broader implications on the global economy.

Effect on U.S. and Global Economies

It is anticipated that the tariffs will accelerate U.S. inflation moderately and slow economic growth in the short term. However, the greatest impact is expected to be on the economies of Canada and Mexico, which could potentially push both countries into a recession.

OPEC+ Decision and Oil Prices

Oil prices have experienced a decline since the recent OPEC+ decision to increase oil production starting in April. This gradual increase will reverse the production cuts that major oil producers agreed to in November 2023.

Impact of Oil Prices on Inflation

Lower oil and gas prices were a key focus for Trump during his campaign, with a promise to increase drilling to reduce transportation costs and curb inflation. Since Trump took office, oil prices have steadily declined, with WTI decreasing by approximately 15%, leading to a slight reduction in fuel prices over the recent month.

Role of Rising Oil Prices in Inflation

The rise in oil prices contributes to inflation by raising gasoline costs for consumers and increasing production and transportation expenses for businesses. Studies suggest that oil prices can also influence inflation expectations, which play a significant role in actual price hikes.