Market Analysis

Oil Slides as U.S. Pauses Ukraine Aid, Tariffs Loom and OPEC+ Raises Output

Amos Simanungkalit · 04 Mar14.8K Views

Image Credit: Reuters

Oil prices continued to drop on Tuesday following U.S. President Donald Trump’s decision to pause military aid to Ukraine and as markets prepared for the implementation of U.S. tariffs on Canada, Mexico, and China.

Brent futures dropped by 54 cents, or 0.75%, to $71.08 a barrel, while U.S. West Texas Intermediate (WTI) crude declined by 36 cents, or 0.53%, to $68.01. The halt in U.S. military assistance to Ukraine, confirmed by a White House official on Monday, came after a tense meeting between President Trump and Ukrainian President Volodymyr Zelensky last week.

The market has interpreted the U.S.-Ukraine distancing as a signal of potential de-escalation in the conflict, which could lead to sanctions relief for Russia and increase oil supply in the market. This followed reports that the White House has asked the State and Treasury departments to draft a list of sanctions that could be relaxed in upcoming discussions with Russian officials.

However, analysts at Goldman Sachs have pointed out that Russian oil production is more constrained by its OPEC+ production targets than by sanctions, meaning that easing sanctions may not significantly boost oil supply.

Additionally, OPEC+ decided to move ahead with an oil output increase of 138,000 barrels per day, the first increase since 2022, which also weighed on prices. Oil prices fell by about 2% to a 12-week low on Monday due to this news and concerns that the new U.S. tariffs will hurt global economic growth.

Trump’s 25% tariffs on imports from Canada and Mexico are set to take effect at 12:01 a.m. EST (0501 GMT), with Canadian energy imports subject to a 10% tariff. Meanwhile, tariffs on Chinese goods will increase from 10% to 20%. Analysts expect these tariffs to negatively impact economic activity and fuel demand, putting further downward pressure on oil prices.

"Market participants are struggling to assess the impact of the energy-related policies from the Trump administration this month. However, those weighing on the downside, particularly U.S. tariff measures, are currently prevailing," said analysts from BMI in a note.