(Bloomberg) -- Oil dropped to around $56 a barrel after President Donald Trump said the U.S. would impose tariffs on all Mexican goods, opening up a new front in the trade war and further damping the demand outlook.

Futures in New York fell as much as 1.6% after Trump announced the 5% levies, which will be effective from June 10 and could go as high as 25% on Oct. 1., which are aimed at getting Mexico to stop immigrants illegally entering the U.S. That followed a 3.8% tumble Thursday that was driven by rising U.S. gasoline stockpiles and a smaller-than-expected oil draw from storage facilities, which fueled worries about falling demand in the world’s largest economy.

Trump’s announcement on Mexico took markets by surprise, rattling investors already spooked by the worsening U.S.-China trade war and raising the prospect that the White House could impose levies on Europe. The deteriorating demand outlook has put oil on course for its biggest monthly drop since November, despite a tight supply environment and an increasingly tense situation in the Middle East.

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The tariffs on Mexico are “very negative for global growth” because U.S. levies on Europe now appear more likely, said Stephen Innes, head of trading at SPI Asset Management. “Given oil markets are tethered to the hip of risk markets currently this is bad news for oil bulls.”

West Texas Intermediate crude for July fell 63 cents, or 1.1%, to $55.96 a barrel on the New York Mercantile Exchange as of 1:11 p.m. in Singapore after dropping as much as 93 cents earlier. The contract is down 4.5% so far this week, taking its drop in May to more than 12%.

Brent for July settlement declined 88 cents, or 1.3%, to $65.99 a barrel on London’s ICE Futures Europe exchange after closing down 3.7% on Thursday. The global benchmark crude was trading at a premium of $10.01 a barrel to WTI.

The tariffs on Mexico raised the specter of a global trade war and also spurred speculation that an agreement between the U.S. and China may now be harder to reach. In fresh evidence of the toll the dispute is taking, a Chinese manufacturing gauge for May dropped more than forecast. Beijing is mobilizing its state-run energy industry to prepare for a long struggle with the U.S., and also has readied a plan to restrict exports of rare earths, according to people familiar with the matter.

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American oil inventories fell by 282,000 barrels last week, the Energy Information Administration reported. That compared with the median forecast for a 1.36 million barrel decline in a Bloomberg survey. Gasoline stockpiles rose for a second week despite the onset of the summer driving season.

“U.S. inventory draws normally signal market strength,” but there are bigger concerns with the global economy, said John Driscoll, chief strategist at JTD Energy Services Ltd. in Singapore. Trump “seems willing to fight trade wars now on multiple fronts” and this is a genuine worry for global growth and oil demand, he said.

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