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 takenaim atChinawith billions in tariffsfor 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'scrosshairs, forcing U.S. allies, including Canada, to announcetariffs of their own targeting everythingfromHarley-Davidsonsto blue jeansto Kentucky bourbon evengherkins.

The oil market has so far avoidedthe conflict and any collateral damage.But asthe Organization of the Petroleum Exporting Countrieswraps upits three-day biannual meeting in Vienna today, it's worth considering the potential threats tothe 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 dayto help push up prices. But crude prices have since rebounded by more than 30 per cent, andOPEC 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 witheach other, butas 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 than300,000 barrels a day to China about $1 billion US wortha 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 BromptonGroup, says if China follows through with its threat, it would essentially bestopping 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 bethe perfectthorn in Trump'sside.

In May, the Trump administration pulled out of the nuclear deal his predecessor had struck with Iran, and reimposed sanctionsthat effectively cut Iranian oil out of the global market. But Tehran isunlikely to sitidly by and not try to find a replacement buyer for its major export product. Especially if it can antagonize Trumpin 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, Lausays it's a good bet that China and Iranwillcome together on the sidelines of themeeting 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 atrade war typically isn't good for anyone, there could be opportunities for Canadian oil producers amid the uncertainty. OPECmember Venezuela has seen its output plummet because of itsongoing 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'soilsands.

DanEberhart, CEO of Florida-based oilfield services companyCanary, says he's concerned about the state of the Canada-U.S. trade relationship, but he does seea "hand in glove" opportunity for Canadian oil companies to supply more crudeto those refineries.

As for OPEC, Eberhart expects the cartel to continue to act in its owninterest, 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 Firstis 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, andthe U.S. on the other. (Canada will probably find itself somewhere in the middle.)

The scenario showswhy 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."