Trump’s Trade Wars Could Spark A Massive Drop In Oil
Today, I am breaking with two of my rules in writing these pieces. I generally try to steer clear of politics and to avoid being alarmist or overly sensational. What has forced me to ignore both rules is the announcement on Thursday by Donald Trump that he is going to enact tariffs on steel and aluminum next week. Politicians in general have less influence on economies than they think, but they can cause disruption, and particularly when they make economic decisions for political reasons. That is what this is, and it has the potential to cause a massive selloff of oil and other commodities.
You may feel that this is ultimately good policy and given the circumstance, a strong argument can be made that is true. Here though, the timing of the announcement suggests that it is in response to what looks like increasing chaos in the administration and a Special Counsel’s investigation that seems to be moving inexorably closer to the President himself. In other words, it is a political play, regardless of the potential short-term economic consequences. The actual results of imposing tariffs and sparking retaliation, however, are not the point. What matters, as is so often the case, is perception, and the perception of traders will be that measures such as those proposed could pose a serious threat to global growth and thus cripple demand for oil.
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There has been a lot of focus during oil’s recovery back into the 60s on supply, with the output cuts from the OPEC led group of producers leading to a reduction in the worldwide glut of crude. But, those cuts are only effective if demand continues to grow.
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