Analysis of Tariff and Sanctions Impacts on an Increasingly Volatile Market
The market has gone through the first round of many potential disruptions for 2025. While there is an array of headline risk in the offing, the event risk rally, as well as the physical market response, was a good test to feel out where market economic boundaries are trending. Tighter crude markets clashed with pockets of softness in regional refined product markets, likely pointing to additional mean reversion for oil prices as the market absorbs the broader economic fallout from ongoing trade war escalations in the medium term. We still think tactical risk deployment where crude and product spreads have become stretched offers better risk/reward than directional risk deployment while the market continues to digest headline risk at a rapid pace.
Escalation in tariff risk is happening in real time, and while that’s broadly bearish for global oil demand, the carve-out for Canadian energy limits upside risk for US gasoline prices. Using Q4’24 average net margins for Midwestern refiners as a target, the same level of profitability could be achieved with a 4–6% increase in refined product pricing, and WCS-WTI spreads between -$14/bbl and -$16/bbl, assuming a 10% tariff.
Russian seaborne oil supply chains are already mitigating sanctions liability for crude exports into Asia. While the initial announcement from the Biden administration sparked a buying spree to cover near-term refinery needs, sanctioned vessels and entities are slowly being worked out of Russia’s supply chain. India has expanded insurance breadth for Russian cargoes berthing at its ports, and we’ve seen non-sanctioned vessels en route to Kozmino to service the short-range ESPO crude oil trade into north Asia. Russian oil differentials have also pushed to price cap compliant levels. That being said, clearing liability from Russian producers will require more creative measures.
Asia’s refined product margins have pushed back down to levels that we saw late last summer during oil’slatest rally. Outperformance for Middle Eastern crudes brought on by last month’s sanctions announcement has begun to pressure Asian refined product markets. With negative net refinery margins and stricter Chinese tax policies, independent refinery utilization is now trailing January 2024 levels by 7%. As the physical market continues to digest the latest disruption, mean reversion for the Dubai benchmark, lower utilization, and refinery maintenance should relieve some pressure on Asian product markets at the expense of recent crude gains.
The physical market has been clearing well, particularly for sour grades, but refined products should outperform from here. While we still remain bullish on heavy sour crudes broadly, the recent outperformance seems likely overdone at this point. Atlantic Basin physical premiums have softened from mid-January highs, as light sweet grades are starting to show some softness, but overall barrels have been clearing relatively well. While spring maintenance should further soften demand for light sweets, Dubai’s $2/bbl premium over Brent is pressuring downstream economics enough to invoke a change in behavior for marginal refinery operators. Simply put, we expect the crude complex to normalize from here, allowing for more room at the margin for refined products. That being said, tariff escalation will likely serve as a headwind to refined product demand in the medium term, which could offset some relief provided by spring maintenance season.
Elizabeth Arseneau, CIM, FMA Portfolio Manager | RBC Wealth Management | RBC Dominion Securities Inc. | T. 416-960-4592 | F. 416-974-0332 | 2 St. Clair Avenue West, Suite 1900, Toronto, Ontario M4V 1L5