Thu, 02/06/2025 - 07:52
With all the hubbub around stocks and crypto following the inauguration of Donald Trump, less fashionable assets like oil and gas have flown somewhat under the radar of many investors in recent weeks. Threats of tariffs of anywhere between 10% and 100% have been thrown around by the new administration with seemingly indiscriminate direction. While much has been said about the potential impact on corporate equities in both the US and China, little has been discussed about the potential impact on these key industrial resources right when they are at close to peak demand in the dead of winter. Household name crudes like Brent, WTI, and Light Sweet, along with the major natural gas vehicle, the Henry Hub, have been relatively stable since the unprecedented price hikes of 2022.
However, in the past two weeks, both oil and gas have dipped by an average of 5% and 15%, respectively, on the potential of a protracted Sino-US trade war depressing demand. The catalyst for the price drop has been the tit-for-tat tariff response from China targeting US LNG, which has left more available to meet the demand of geopolitically unstable Europe. The question now is, how long will the trade war continue to strangle prices and what other factors could impact oil and gas markets in the near to medium term?
It takes two to tango
Trump's tariffs on China come as little surprise to the majority of investors. After pledging throughout his campaign to be "tough on China", the announcement of an additional 10% levy on Chinese goods was, if anything, less than expected. However, the Chinese response might well have surprised some. They include a 15% levy on US coal and LNG, as well as a 10% duty on crude oil, farm equipment, and a small number of trucks and other large-engine passenger cars. This is a sign that a more prepared and stronger China is ready and willing to duke it out with Trump in this latest battle in the trade war between the two nations.
The upshot of this is that the US will likely escalate its own tariffs, perhaps prompting the Chinese to follow suit. All of this means that demand for US LNG will continue to suffer as the world's second-largest economy — with no real resources of its own — looks elsewhere for its oil and gas needs. It all boils down to just how bombastic Trump decides to be with his tariff rates and who blinks first. After all, the Chinese do have proximate suppliers of relatively cheap gas and crude oil, but if the goods they produce with those resources become too expensive to consumers in a major market like the US, the reduced sales would cancel out any savings multiple times over.
Everyone has their price
With so much going on just now, it's easy to forget what the market was like just a year ago. It's worth noting that even with 10% tariffs added, at their current levels of $3.71 and $75.42, respectively, Henry Hub and Brent crude are both at reasonably competitive prices, which could temper the slowing demand or at least make the cost for European consumers competitive enough that US LNG is favoured over Middle Eastern alternatives. Gas prices have actually been quite low ever since the spike in the summer of 2022. Indeed, even if the Henry Hub loses 50% of its current value, it's still going to be within its average range for the entirety of 2024.
And with the majority of the heating season almost over for much of Europe and the US, one could argue that natural gas demand will fall naturally and much more precipitously than any tariffs might provoke it to. What is of more concern ahead of the summer driving season is oil, yet Brent was almost 20% higher than it is now back in March 2024, and the economy didn't crash then. This means that with the 10% tariff added to the cost of Brent, WTI, or Light Sweet, oil is still 9% cheaper than it was this time last year. So, while it might not be prime time to stock up, there's no reason to panic-sell any oil holdings just yet.
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