Date: November 28, 2024
Location: New York
- The global oil market is highly uncertain as a result of the proposed 25% import tariff on crude oil from Canada and Mexico by U.S. President-elect Donald Trump, which has the potential to disrupt trade flows and upset supply chains. Experts predict that Canadian and Mexican producers may be compelled to drop their prices, divert some of their exports to Asia, and face logistical challenges should the tariffs be implemented.
- Sources familiar with Mr. Trump’s trade plans said that oil imported from Canada and Mexico wouldn’t be exempt from higher tariffs, part of the strategy to address trade imbalances with neighboring countries. However, the move could have far-reaching implications for North American and the world energy markets, prompting a warning from the U.S. oil industry that they might harm consumers and disrupt refinery operations.
- Canada and Mexico are the biggest suppliers of oil to the U.S., accounting for 63% of the total crude imported into the U.S. Canada provides 52% while Mexico provides 11%. The two countries depend so much on the demand from the U.S. for their oil, but now analysts are looking at how the tariffs might make them shift and look elsewhere for their markets.
- Tariffs Could Push Canadian and Mexican Oil to Asia
- If Trump follows through with the tariffs, Canada and Mexico will face difficulties in rerouting crude oil exports that are normally shipped to the U.S. Many U.S. refineries are configured to process the heavy, high-sulfur crude oil produced in these two countries. Refiners may have to absorb the cost of the tariffs since they have few alternatives for this supply, which could raise fuel prices for U.S. consumers.
- Canadian and Mexican producers will then find refuge in Asian markets. Refiners in Asia can now process heavy crude that they were unable to a few years ago. The imports of crude from Canada have been increasing to Asia, particularly China and India, with the commissioning of the new expansion of the Trans-Mountain pipeline, which has created additional export routes. Mexico has seen its exports to Asia going down by 21% this year.
- Daan Struyven, co-head of global commodities research at Goldman Sachs, warned that Canadian producers might have to offer deeper discounts to attract demand from Asian refiners, potentially causing revenue losses. Long-distance shipping costs would further compound these challenges, making it more difficult for Canadian and Mexican producers to maintain profitability.
- European Demand for Mexican and Canadian Crude Remains Limited
- The impact on European refiners is likely to be less pronounced. Although Maya crude from Mexico is a significant supply for Spanish refineries, competition from Asian markets may limit Europe’s ability to absorb excess supply from North America. Kpler data indicates that Mexican exports to Europe have averaged around 191,000 bpd, with Spain taking the majority. Canadian crude exports to Europe are much smaller, averaging 85,000 bpd.
Analyst at Energy Aspects Christopher Haines observed that even though European refiners may take advantage of low-priced Mexican crude, their imports are unlikely to increase drastically because demand in Asia remains high.
- Ambiguity on the Implementation of Tariffs
- Even with the anticipated disruptions, there are skeptics in the industry who think that Trump will not actually pursue his proposed tariffs. Trump has already used tariffs as bargaining chips in trade negotiations. Most analysts believe that the oil tariffs are part of a broader political strategy rather than a decision on policy. The tariffs on Canadian and Mexican oil will have inflationary effects in the U.S., particularly on fuel prices, which will hurt consumers and refine the U.S. economy.
Goldman Sachs analysts warn that even though the tariff proposals may be used as negotiating tools, the actual implementation is far from certain. “The market is on edge, but we remain cautious about the likelihood of Trump carrying through with this policy,” Struyven said.
- The Global Oil Market Reacts
- Global oil trade patterns are likely to change when tariffs are implemented. Due to the fact that more oil has to be channeled towards Asia, because Canada and Mexico are made to redirect it, U.S. refiners will have to turn elsewhere for heavy crude; therefore, it may become pricey and disrupt supplies. Rising demand for heavy crude among Asia’s nations, especially in China and India, placed them as leaders in the world’s future oil trade.
- While European refiners may have some opportunities to buy discounted crude, the overall impact on the global supply chain will depend on how quickly Canadian and Mexican producers can adapt to the shifting market dynamics and whether U.S. refiners can adjust their operations to manage higher costs.
As Trump’s administration gears up to take office, all eyes in the oil industry will be on all these proposed tariffs, with all these implications for oil prices, refinery operations, and trade relationships between the U.S., Canada, Mexico, and Asia.
