Oil producers in Canada and Mexico will likely be forced to reduce prices and divert supply to Asia if US President-elect Donald Trump imposes 25% tariffs on crude imports from the two countries, traders and analysts said.
Two sources familiar with Trump's plan told Reuters that oil would not be exempted from potential tariff hikes on imports from Canada and Mexico even as the US oil industry has warned that the policy could hurt consumers, industry and national security. The United States accounts for 61% of crude exports from Canada and 56% from Mexico, ship tracking data from Kpler showed.
Canadian crude exports have jumped 65% to about 530,000 barrels per day (bpd) so far this year, the data showed, after the opening of the expanded Trans-Mountain pipeline increased shipments to the US and Asia.
"If Canadian producers face export constraints, or are unable to re-route barrels, that were previously exported to the US, to other markets, they may face deeper discounts and may also suffer some revenue losses," Daan Struyven, Co-head of Global Commodities Research at Goldman Sachs, told reporters on Wednesday.
Both Canada and Mexico mainly export heavy high-sulphur crude that is processed by complex refineries in the US and most of Asia.
"The impact is all on the heavy grades. What are the US refiners going to do? Even Saudi Arabian heavy crude is limited," a Singapore-based trader said, adding that some US refiners can only receive crude via pipelines, limiting their options for imports.
"Either the producer or the refiner will have to absorb the tariffs," he said, adding that Canadian producers will have to discount their oil more to attract demand from Asian refiners and cover long-distance shipping costs. Refining sources in Asia and analysts said they expect to see more Canadian and Mexican oil heading to Asia if Trump imposes the tariffs.
"We are likely to see quite some volume going to China and India, where refiners' configurations are able to refine the crude," said LSEG analyst Anh Pham. TMX exports to Asia have risen in recent months as Asian refiners, led by Chinese processors, test the new grades. However, Mexican exports are down 21% to about 860,000 bpd this year.
Still, some traders and Goldman Sachs analysts remain sceptical that Trump would actually impose the tariffs, which he has previously used as a negotiating tool, as doing so would drive inflation for US consumers and refiners.
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