It is impossible to overestimate the significance of the tech sector in shaping sentiment in equity markets, and fears of overstretched valuations were always to emerge. It came yesterday, together with rising anxiety about the global factory activity. Japan’s manufacturing sector shrank at its fastest pace in 19 months. Tepid new orders in the US led to the eighth consecutive monthly contraction in factory activity. A private survey reached the same conclusion in China, where expansion slowed last month, while manufacturers across other Asian economies are clearly feeling the impact of US tariffs in the form of declining orders. A correction was not only reasonable, but almost mandatory.

This ostensibly ominous backdrop, coupled with a rally in the US dollar as hopes of a December rate cut fade, prevented oil from making significant gains. The 50 cents/barrel loss in the two major crude oil contracts would likely have been steeper were it not for support from refined products, as international sanctions on Russian oil exports force importers to seek alternative supplies. This was reflected in last night’s API statistics, which showed distillate inventories falling by 2.46 million bbls, gasoline stocks plunging by 5.65 million bbls, although crude inventories swelled more than 6.5 million bbls.

Whether the retreat in risk assets proves to be a mere correction or something more substantial will partly depend on the first serious legal test of Donald Trump’s tariffs, with the Supreme Court hearing getting underway today. A verdict is expected only after weeks of deliberation. Nonetheless, what is at stake is a ruling on whether the US President is authorised to impose import tariffs using the so-called International Emergency Economic Powers Act (IEEPA). Needless to say, if the Supreme Court finds in favour of US business associations, the Chamber of Commerce, and other stakeholders opposing the use of such powers, a loud sigh of relief will be heard from the country’s importers and even manufacturers. However, the immediate consequence, given that about $50 billion of already collected tariff revenue, which has helped reduce the budget deficit, might have to be repaid, could be a sharp sell-off in stocks. Never a dull day under the incumbent administration.
 

Strategic, Impulsive or Deflective?

The transactional policymaking of the incumbent US government is well known and dreaded. It brazenly uses its economic and military might to pursue whatever foreign policy goals it seeks to accomplish. Brazil is a case in point. Tariffs were imposed on the country despite the US running a trade surplus with it, in order to pressure Brazil’s sovereign Supreme Court not to prosecute former President Jair Bolsonaro, a close Trump ally.

In recent weeks, pressure has been mounting on countries with significant oil production capacity. Sanctioning two of Russia’s biggest oil companies surprised investors. The US military presence around Venezuela continues, and last week, a verbal threat of military intervention was directed at Nigeria, another OPEC+ member. The consequences of these developments remain unclear, as does the driving force behind them. Some argue that they fit the government’s transactional approach; others believe they reflect the President’s capricious and spontaneous decision-making, or perhaps merely serve as deflections from the domestic “Democratic hoax,” a reference to the Epstein files. In any case, the salient question is whether there is a reasonable chance of a material impact on global oil supply.

In Russia’s case, plausibly, there is. Looking back at the US President’s actions, rather than words, since taking office in January, his growing frustration with Vladimir Putin has become increasingly evident. He once openly expressed admiration for the Russian strongman, something that has since turned into utter disappointment. As a result, the US imposed sanctions on the country’s two largest oil companies, Rosneft and Lukoil, forcing the latter to sell its foreign assets.

It was a bold move, given that anywhere between 30% and 50% of the Russian government’s revenues come from oil and gas. Better yet, in September, budget revenues from the sector fell below 25%. The UK government estimates that Rosneft and Lukoil together exported around 3.1 mbpd before the sanctions, with Rosneft alone accounting for nearly half of Russia’s crude oil production.

It is indeed an audacious step, aimed at depriving the invader of critical revenues, as the end of the war against Ukraine remains out of sight. It also seeks to force Russia to the negotiating table, although, judging by Moscow’s consistent narrative, that seems more like a pipe dream than a realistic prospect. Whether these sanctions will be effective depends largely on enforcement and on whether “friendly nations,” Russia’s traditional oil buyers over the past three years, might be threatened with exclusion from the US financial system. At present, full-blown secondary sanctions appear unlikely. Even so, several oil majors have warned of potential supply shortfalls, even as they enjoy the benefits of strong crack spreads created by the void left in the global product market by sanctions and by relentless Ukrainian strikes on Russian energy infrastructure. The situation remains fluid. For now, the overall impact is mildly, but not entirely, bullish for oil prices, as some Russian oil continues to find safe passage to willing buyers.

The US military presence in the Caribbean around Venezuela has so far had a muted impact on oil production and exports. President Trump has authorised the deployment of the CIA in the country, sent the world’s largest aircraft carrier to the region, and approved regular strikes on alleged narco-terrorists without providing evidence. According to official accounts, these strikes are part of the US’s war on drugs; however, the ultimate objective may be regime change in Caracas. If successful, such a move could see millions of Venezuelans return home and oil output rise, but such developments remain premature. In addition to the heightened political risk in the region, the US could further pressure the Venezuelan government by enforcing stricter maritime inspections or imposing a direct export ban on Venezuelan crude shipments.

Another OPEC member, Nigeria, producing around 1.5 mbpd of crude, has recently come into the US President’s crosshairs. The Nigerian government’s alleged complicity in allowing the “mass slaughter” of Christians by “radical Islamists” provoked the ire of President Trump, who instructed the Department of War to prepare for possible (and presumably entirely illegal) military action in Nigeria. He also warned that the US would go in “guns-a-blazing” while threatening to halt aid and assistance to the country.

To put a tabloid spin on these developments, it is tempting to note that the combined crude oil output of these three countries exceeds 12 mbpd; if all hell were to break loose, the repercussions could be devastating. A reasonable expectation, however, is that there will be no supply disruption from Nigeria and possibly none from Venezuela. Russia’s difficulties in exporting its hydrocarbons are undeniable, yet the market has so far taken them in stride. Should sentiment change, one can be certain the US stance will, too. The last thing Mr Trump would tolerate, one year before the midterm elections, is domestic retail motor fuel prices approaching the $4/gallon level.

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