Market Minute: Tariff War is Inflationary & Deflationary for U.S. Energy Markets

Without question, the tariff battles of the past several weeks have heightened volatility across the board — from equities to currencies and commodities. At a high level, tariffs can be inflationary for a wide range of goods and may also dampen demand for products like consumer electronics, vehicles, and apparel. However, for the energy sector, the impact is more complex than simply labeling tariffs as good or bad. The U.S. energy market currently stands at a critical crossroads. Let’s break down the key areas of the market that may benefit from tariff policies, as well as a specific segment that could actually experience positive price action as a result. 

The Impact on U.S. Crude

Prior to Donald Trump’s second inauguration, crude oil prices spiked briefly above $80 per barrel. Was this due to expectations of a “Drill-Baby-Drill” policy revival? Not at all. In the early weeks of the year, the energy markets were primarily concerned with extreme winter weather conditions that threatened extraction and logistics operations across various energy sectors, from oil to natural gas. Additionally, increased sanctions on Russian energy companies and restrictions on the shadow fleet drove prices higher overseas. However, most of the catalysts behind the price surge were supply-side disruptions rather than strong demand drivers such as increased domestic consumption or a global resurgence in demand from major economies like China and Germany. 

Now, however, rising tariffs on U.S. oil are set to dampen international demand, pushing prices lower—a trend already evident over the past several weeks, with crude oil prices falling more than 12% from their recent peak. Meanwhile, gasoline prices have remained stable, even as inventory levels continue to build at an aggressive but seasonally typical pace. Yet, without a strong demand-side driver and with export demand for U.S. light sweet crude beginning to stall, refiners may soon face gasoline supply overruns. This could lead to further inventory pressures and eventually weigh on gasoline prices over the next two months—a countertrend scenario as the market gears up for the summer driving season. While this is good news for consumers in the short term, it may place additional pressure on domestic refining margins.

Diesel is a Different Story

Diesel, fuel oil, and heating oil share a similar chemical composition, and refiners typically prefer heavier crude to produce these products. While the U.S. does have heavy crude reserves, domestic supply is insufficient to meet demand for certain heavier byproducts, requiring substantial imports of heavy crude. Although these fuels can technically be produced using light sweet crude—of which the U.S. has an abundance—the refining process requires additional chemical additives to make this viable.

The Midwest refining infrastructure is particularly geared toward processing heavy crude, meaning any disruption in heavy crude supplies — especially from Canada — could significantly impact regional energy prices. This risk grows if tariff wars continue to escalate. 

Diesel prices have been under bearish pressure since June 2024, primarily due to weak demand and competition from LNG-powered vehicles in East Asia, which have begun eroding margins. However, distillate inventory levels are currently below the five-year average. Any meaningful disruption in the supply of heavy crude could support price stability for diesel, potentially reversing its recent weakness. Unfortunately, since diesel is a key input for transportation — powering trucks, locomotives, and other freight carriers — such a shift could create stealth inflationary pressure on a broad range of consumer goods.