Well, here we are. Finally, ‘Liberation Day’ is upon us and whether it will turn out to be an inflection point in the progress of world trade, a complete ‘cry wolf’ dud, or something in between will only be revealed from the Rose Garden of the White House at 8pm GMT. In his run up to the Presidency, Donald Trump’s tariff manifesto was something easily understood, with a 10% sweep on all imports and a threat to China of 20% to 60%, the world and its markets at least had some parameters. However, since being in office tariffs have been turned on and off more times than even an IT specialist recommends and now there is the prospect of reciprocal tariffs, which will even take into account a trading partner nation’s sovereign tax policy such as Value Added Tax (VAT).

Running the avenues of the ‘what if’ flow charts is pointless, the variables are frankly inconceivable which is why markets remain at ‘DefCon nervous’ and investor flight instruments such as Gold pile on value with daily record highs.  Yesterday’s bloviation on tariffs included, “It’s really, in a sense, a rebirth of our country,” which it needs to be bearing in mind the data emulating from the Institute for Supply Management (ISM). Its Manufacturing PMI fell from 50.3 in February to 49.0 in March offering a state of contraction. The report was a litany of warning for the US economy with new orders, backlogs, production and employment all contracting. The employment concern saw a mirroring in the JOLTs job openings as work opportunities fell by 190k with the ratio of job openings to unemployed workers falling to the lowest since September last year. How this data manifests in the Non-Farm Payrolls will be eagerly awaited, but for now, and in the US, the recent show in a decline in confidence data due to the uncertainty surrounding tariffs is being realised in the manufacturing sector.

Secondary tariffs

It is interesting how words are much more effective in moving markets than guns, bullets and all the finery of warfare. No matter the atrocities and deaths being endured due to the Ukraine and Gaza wars, oil does not seem to hold onto a geopolitical premium because there has always been a workaround to any prospect of supply disruption. The introduction of secondary tariffs, or at least the threat of them, are very much aimed at circumvention of sanctions, target those that actively engage in such practices and eventually fall upon nation state customers, in this case those that lift Russian oil. If implemented, the likes of India, China, Hungary, Slovakia and other countries in continental Europe might just up end with a stark choice between the convenience and cheapness of Russian oil or access to American markets. Nothing is firm in this world, secondary tariff threats to Russia’s customers might be just as realistic as finding a quick solution to the Ukraine war itself, but oil prices are sensitive at this time and rhetoric reaps more reaction than squadrons of suicide drones. The market might be supplied enough to overcome a world without Venezuelan and Iranian crude, but not Russian.

One of the consequences of possible secondary tariffs is a repetition of how Indian refineries feel compelled to come back to the market in an effort to null any disruption the legalities of landing Russian oil might entail. It is a repetition of behaviour and price action seen after the Joe Biden era sanctions passed in early January on the ‘dark fleet’ which transported Russian oils to the far-flung corners of oil destination. According to OPEC’s March Monthly Oil Market Report, India's crude imports began the year averaging 4.9mbpd. In terms of crude imports by source, Kpler data shows Russia had a 33% share of India's total crude imports in January, down from 38% in the previous month. When that data updates and taking into account the hiatus in supply troubles after the Biden inspired sanctions became manageable, it will be likely averaging lower which is why the front of the various grades that India is seeking in substitution are subject to buying interest. Evidence of Indian buying activity is reported via Bloomberg, Bharat Petroleum Corporation Limited (BPCL) purchased two 1 million barrel lots of WTI crude via a tender for early-to-mid-June arrival further to buying 2 million barrels of Murban for May delivery. June Futures Dubai/Brent reached a high of $1.83 in January, fell away during said hiatus to flat, and in recent days has rallied to $0.50/barrel premium. In a likewise Murban/Brent pairing the recent rally is even more pronounced. After ticking back to a slightly negative standing, it has rallied with a Murban premium of $1.40/barrel. The North Sea basket of Brent is not to be outdone, and even though the flat prices of Asian grades are outstripping it, the hefty backwardation seen in the front spread before expiry has been taken up in tailwind by June/July futures offering a signal to physical appetite.

We do not think secondary tariffs on Russia will happen, it will take an inordinate amount of oil away from the international oil balance (the figure is a variable and would depend on targeted destinations) and prices would scream away to eye watering levels and bring a torrent of global inflation, the very two things the Trump administration is at pains to avoid. However, tariffs or nay, the market is entering one of its best seasonally historical bullish periods. Refinery runs are increasing in the United States yet Heating Oil and Gasoline inventories have been falling along with those of Crude. Keeping the worry of the infamous driving season away normally sees a push to build stock in the motor fuel but there is no evidence of such cushioning yet. Demand is represented in how the RBOB futures structure is steadily building an ascending monthly backwardation. If US Gasoline demand keeps WTI at home, international grades will still be furnished with reasons to be price friendly. The fizz and pop of secondary tariffs will be ephemeral, at least for Russian oil, but it does serve to remind the market of potential short-term tightness to come.

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