US President Donald Trump has imposed a 25 per cent tariff on Mexican crude oil and a 10 per cent tariff on Canadian crude oil starting in early March, delayed from the initial date in February, setting off uncertainty in markets despite an initial boost in oil prices.
Industry analysts have said markets can expect short-term upward pressure on US crude prices, but warned of broader economic impacts including inflation risks. A ceasefire in the Russia-Ukraine war could also be bearish for oil prices if Trump pushed to remove sanctions on Russian oil. Following confirmation of the tariffs on oil imports from Canada and Mexico, West Texas Intermediate futures rose 2.5 per cent to US$70.15 a barrel by the end of February.
During the calendar year 2023, US refineries imported about 6.5 million barrels of crude oil per day, of which more than 71 per cent was supplied by Canada and Mexico and nearly 60 per cent from Canada alone. Investment bank Goldman Sachs said the proposed oil tariff could cost foreign producers US$10 billion a year, as Canadian and Latin American heavy crudes were reliant on US refiners due to limited alternative buyers and processing capabilities.
However, Goldman expects the US to remain the primary destination for heavy crude, as American refiners remained the most competitive buyers due to their advanced refining capabilities and low costs. Oil prices would need to rise by 50 per cent a barrel to make medium crude from the Middle East more attractive to Asian refiners, as US Gulf Coast refiners prioritised domestic light crude over imported medium grades.
Goldman also estimated that US consumers would face an annual tariff cost of US$22 billion, while the government would generate US$20 billion in revenue. The US Congressional Research Service said refineries that continued importing from Canada and Mexico would pay tariffs assessed on the value of crude oil imports, however, some refineries could be financially motivated to secure crude oil not subject to higher tariffs.
The service said: “This optionality makes it difficult to determine how US crude oil and petroleum product prices might be affected. “Exactly how tariffs, and related costs, might be distributed throughout the supply chain will likely be a function of responsive actions by US refineries, Canadian crude oilproducers/exporters, and the government of Alberta [where Canada produces most of its oil.
“Tariffs could be reflected in refining profits, Canadian crude oil prices, and US petroleum product prices.” It noted that the immediate impact would be to reduce refinery profitability, which would be avoided by those refineries with access to flexible maritime oil supplies. Analysis by Wood Mackenzie suggested that the proposed tariffs could trigger a significant shift in North American crude flows.
Dylan White, Principal Analyst for North American Crude Markets at Wood Mackenzie noted that since the implementation of tariffs were delayed by a month, it left room for various scenarios. He explained: “The uncertainty surrounding US policy is likely to continue; ongoing talks could lead to a lifting of tariffs or spiral into steeper penalties on oil imports.”
Modelling a 25 per cent tariff scenario, Mexican oil exports would shift away from the US towards European and Asian markets, affecting about 600,000 barrels a day of Mexican crude imports to the US. However, the impact might be mitigated by the closure of the Lyondell Houston refinery and the launch of Pemex’s Dos Bocas refinery.
White highlighted that US refineries, particularly on the West and Gulf Coasts, would need to seek alternative heavy crude supplies from Latin America and the Middle East, with Iraq being a potential major source. However, these alternatives are generally more expensive than Canadian and Mexican supplies – for Canada, a 10 per cent tariff scenario would likely see Canadian crude continuing to flow to the US Midwest and Gulf Coast.
This is because landlocked Midwestern refineries have limited alternatives to Canadian heavy crude. However, the Trans Mountain pipeline and its TMX expansion could facilitate increased Canadian crude shipments to Asia, potentially reducing flows to the US West Coast. However, Wood Mackenzie does not anticipate a 10 per cent tariff to be reason enough to redirect Canadian barrels from the US Gulf Coast to Asia.
The consultancy forecasts a reduction in US oil demand by 50,000 barrels per day by 2026 due to the proposed tariffs, partly due to higher refined product prices. Wood Mackenzie’s analysis suggested that relief from domestic producers was unlikely, as production growth in the continental United States was expected to remain measured and primarily driven by major companies in the Permian Basin.
Wood Mackenzie explained that as negotiations continued and policy uncertainty persisted, the North American oil market braced for potential shifts in crude flows and pricing dynamics. It said the ultimate impact would depend on the final implementation of tariffs and the response of market participants across the region.
