How Trump's tariff fight with China could draw in the world's oil powers

The first border skirmishes in the U.S.'s simmering international trade war have been relatively contained. But that could change quickly if the conflict spreads to the primary resource powering the global economy — oil.

So far, U.S. President Donald Trump has taken aim at China with billions in tariffs for alleged intellectual property theft. China, not surprisingly, has responded in kind.

Steel and aluminum shipments to the U.S. have also found themselves in Trump's crosshairs, forcing U.S. allies, including Canada, to announce tariffs of their own targeting everything from Harley-Davidsons to blue jeans to Kentucky bourbon — even gherkins.

The oil market has so far avoided the conflict and any collateral damage. But as the Organization of the Petroleum Exporting Countries wraps up its three-day biannual meeting in Vienna today, it's worth considering the potential threats to the uneasy peace.

Since 2017, the cartel has been uncharacteristically united, with member nations agreeing to limit their output of crude by almost two million barrels a day to help push up prices. But crude prices have since rebounded by more than 30 per cent, and OPEC leader Saudi Arabia is reportedly pushing to open the spigots a little.

That's exactly what happened on Friday, as the group announced it plans to start pumping out an extra million barrels a day. A change like that is bound to affect the oil market, and the impact of all those extra barrels sloshing around will be even larger against the backdrop of global trade uncertainty.

China's big arrow

China and the U.S. seem to be going tit-for-tat with each other, but as Dan Flynn of the PRICE Futures Group explains, China has a disadvantage: "The Chinese are running out of U.S. imports to put a tariff on."

The one big arrow left in their quiver, of course, is oil. The U.S. exports more than 300,000 barrels a day to China — about $1 billion US worth a month.

Although they've yet to lay out concrete details, Beijing has threatened to slap a 25 per cent tariff on all U.S. oil imports.

Laura Lau, senior portfolio manager with Toronto's Brompton Group, says if China follows through with its threat, it would essentially be stopping all U.S. oil imports to the country, "because they can just import it from somebody else for cheaper."

A big candidate to fill that shortage would be OPEC member Iran. From Beijing's perspective, this would be the perfect thorn in Trump's side.

In May, the Trump administration pulled out of the nuclear deal his predecessor had struck with Iran, and reimposed sanctions that effectively cut Iranian oil out of the global market. But Tehran is unlikely to sit idly by and not try to find a replacement buyer for its major export product. Especially if it can antagonize Trump in the process.

As Iranian oil minister Bijan Namdar Zanganeh said as the group met Friday, "we are not here to receive instruction from President Trump and apply it and implement it."

While China isn't an OPEC member, Lau says it's a good bet that China and Iran will come together on the sidelines of the meeting and strike a deal for Iranian crude, and possibly cut out the U.S. entirely.

"If anything, they'll probably get more from the Iranians just to piss off the Americans," Lau says. "They may even get a discount for it."

That could also be music to the ears of another traditional American adversary — Russia. The Kremlin has gone along with OPEC's production cuts since they were first proposed in 2016.

Canadian impact

While the prospect of a trade war typically isn't good for anyone, there could be opportunities for Canadian oil producers amid the uncertainty. OPEC member Venezuela has seen its output plummet because of its ongoing economic crisis. Many refineries on the U.S. Gulf Coast are calibrated to process the thick, heavy oil that Venezuela produces — which is very similar to the type that comes from Alberta's oilsands.

Dan Eberhart, CEO of Florida-based oilfield services company Canary, says he's concerned about the state of the Canada-U.S. trade relationship, but he does see a "hand in glove" opportunity for Canadian oil companies to supply more crude to those refineries.

As for OPEC, Eberhart expects the cartel to continue to act in its own interest, especially with an even more hostile adversary than usual in the White House.

"They are being forced to examine this new Trump era and how America First is going to affect them," he says.

Thanks to Trump's sabre-rattling, it's not hard to imagine a drastically realigned global oil market, with countries like China, Saudi Arabia, Iran and Russia working together on one side, and the U.S. on the other. (Canada will probably find itself somewhere in the middle.)

The scenario shows why Trump needs to be wary of "unintended consequences," Lau says.

"It's probably not what Trump expected to happen," she says, "but if you follow it to its logical conclusion, of course that's what's going to happen."