Oil prices have been on the mend this week after taking a dive following President Trump’s global tariff offensive launch. Yet they still have a long way to go to return to where they were just four months ago—and many oil-exporting countries can’t wait for this to happen. The question is, will it?
For now, the situation does not look good for oil producers. The rebound in prices this week came as a result of indications that Trump was willing to consider some tariff exemptions for things like smartphones and semiconductors. It didn’t last, however, because the latest from the tariff front is that the U.S. president has ordered an investigation into the country’s reliance on imported critical minerals with a view to tariffing those, too. In other words, Trump is very much not done with the tariffs.
However, Chinese crude oil imports surged in March, which was taken as a strong positive sign by traders, contributing to the oil price recovery that saw Brent crude rebound to $66 per barrel and West Texas Intermediate regain ground to above $61 per barrel. Crude oil intake hit the highest in 20 months in March, topping 12 million barrels per day as flows of Iranian and Russian crude rebounded from the lows seen early this year with the U.S. sanctions.
Whether China will keep this rate of imports going forward is an open question, with U.S. exports of crude to the world’s top importer clearly set to get decimated if not outright sapped. For oil exporters, however, the more pressing issue is how long the tariff war will continue. Alas, this is also an open question at this part, although there is a chance of good news down the road. Until then, there will be some suffering, especially among the less wealthy oil exporters.
Reuters reported this week that countries such as Angola, Colombia, Nigeria, and Venezuela were set to feel some pain from the oil price rout that the tariff offensive triggered. The publication cited analysts as saying the longer the tariff war continued, the worse the pain would get for these oil exporters.
One example came from Angola, which had to cough up $200 million for a margin call issued by JP Morgan last week on a $1-billion total return swap, Reuters noted in its report. Nigeria is also vulnerable with regard to Treasury bills tied to the local currency in carry trades, betting that the naira will not depreciate fast against the U.S. dollar.
Of course, besides these specific examples, oil exporters’ general problem with lower oil prices is that it means lower oil export revenues and, consequently, lower budget income in hard currency. Saudi Arabia is feeling that pinch, with its budget deficit set to swell to $75 billion if the rout persists, according to Goldman Sachs analysts. It is not the only one, either. The whole Middle East is going to see higher deficits.
“The deficits on the fiscal side that we’re likely to see in the GCC [Gulf Cooperation Council] countries, especially big countries like Saudi Arabia, are going to be pretty significant,” Goldman’s Middle East and North Africa economist Faruk Soussa told CNBC last week.
Russia is also feeling the pain, with Urals, its flagship blend, dropping to less than $55 per barrel last week versus $69.70 per barrel set in Russia’s budget for this year. Oil and gas revenues account for some 30% of the country’s budget revenue. By the way, the government just released a new energy strategy this week, which sees oil production stable over the next 25 years at an average daily rate of 10.8 million barrels.
Yet, while exporters suffer, importers are set to benefit from the very same price trends—for a while. “The lower oil price outlook is positive for oil importers, albeit unlikely to counterbalance the significant headwinds from the trade war and the significant downside risks,” the chief economist of Abu Dhabi Commercial Bank, Monica Malik, told Reuters. JP Morgan earlier this month raised the odds of a global recession to 60% from 40%. The International Monetary Fund also saw an increased likelihood of global-scale trouble resulting from the tariff war.
So, for both exporters and importers of crude oil, the big question is whether the tariff war will get resolved within weeks or will drag on for months, possibly even years. For now, the signs are good: the 90-day negotiations window Trump opened for everyone, but China put a quick end to the stock market rout, suggesting any trade deals closed during that window would have a similar effect on market moods. As optimism returns, oil prices will climb higher, giving exporters a much-needed break but retaining a ceiling from Trump’s focus on China, keeping oil affordable for importers.
By Irina Slav for Oilprice.com