Why Trump’s metals tariffs could stymie the US shale oil producers

U.S. two-dollar billsPhoto by Leslie Shaffer

U.S. President Trump’s tariffs on steel and aluminum imports will “invariably” raise prices of those metals, and that’s likely to hit U.S. shale producers, OCBC said in a commodity note on Thursday.

“U.S. consumers would need to settle for more expensive domestically produced metals, while imported ones will be more costly given the tariffs,” OCBC noted.

That has “clear implications” for the shale oil industry, as it needs steel for pipeline production, and steel and aluminum for exploration and rig building.

“The costs for exploration and production of crude oil in the U.S. may rise if the tariff should be implemented,” OCBC said.

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That could impact the already sometimes difficult profitability of the shale producers, which can have higher break-even levels for production than oil from other sources.

OCBC said that the tariffs might increase oil prices over the medium term, but that’s not entirely certain.

“We think that the horizon for how oil prices may trend is increasingly hazy given the multitude of risk premiums and political uncertainties in the global economic space,” OCBC said, pointing to the U.S. tariffs, the potential changes to the Iranian nuclear sanctions and how U.S. shale players react to further oil price moves.

Trump’s plan to scrap the Iran nuclear deal could raise the risk premium applied to oil prices, OCBC noted.

Shale producers can ramp up production quickly when oil prices rise, but that rush of supply in the market can dampen any rally in crude prices.

That means market-watchers will be “careworn,” and it could keep oil prices range-bound in the near term, OCBC said, although it pointed to downside risks from oil supply rising faster than demand.

“With the rally in oil prices already seeing some tell-tale signs of fatigue in March, the lack of clarity over these said issues may eventually give the market the needed reason to resume profit-taking into April,” OCBC said.

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