US refiners at risk for crude disruption if tariffs placed on Canada and Mexico

US refiners are waiting to see whether President Donald Trump will make good his promise to put a 25% tariff on Canada and Mexico exports– the nation's two largest suppliers of imported crude.

White House Press Secretary Karoline Leavitt said Jan. 31 that Trump would implement 25% tariffs on Canada and Mexico, and 10% tariffs on China, starting Feb. 1. While Trump had said Jan. 30 he did not want to include oil in the tariffs, Leavitt said those details would not be released until Feb. 1.

Any tariff will impact the US refining sector directly and is likely to cause ripples through global oil markets as crude flows change, and could spark retaliatory actions by Canada and Mexico, particularly impacting exports of US gasoline and other refined products to Mexico.

And given that cost of crude accounts for just over half of the cost of a gallon of gasoline, it is likely that pump prices will reflect the higher crude cost.

US refiners are among most efficient in the world, having feedstock availability and operating costs advantages that other regions lack. Over the years, many US refiners have also invested in their refineries so that they could process the cheaper, heavy crude from neighboring Canada and Mexico.

As a result, Canadian crude accounts for 60% of US crude imports, with its heavy benchmark crude, Western Canada Select, particularly appealing to refiners in the US Midwest, the US Gulf Coast and the US West Coast.

Some analysts have not yet factored tariffs into their long-term outlooks because they think chances are low that tariffs on oil will last long even if they are levied.

"Since we don't expect any of the tariffs on Canada and/or Mexico proposed/threatened by Trump will last very long even if implemented, we have not incorporated those potential short-term impacts into our base case forecasts," said John Auers, managing director of Refined Fuels Analytics, on Jan. 30.

"If Canadian tariffs were to put in place and included both crude and refined products, the most negatively impacted regions would be PADD 2 and part of PADD 4, due to their dependence on heavy Canadian crude," he added, referring to refiners in the US Midwest and US Rockies region.

Who pays?

Auers said he expects most of any tariff-related costs to be absorbed wellhead – putting Canadian producers on the hook for most of the higher crude cost – but not all of it.

"While most of the tariff will be absorbed at the wellhead (perhaps as much as 75%), some will hit the refiners and this will result in both some lowering of refining margins and increases in wholesale and retail product prices for both gasoline and diesel," he said.

Auers and others industry participants agree that the impacts of any tariff which increases the price of crude will be very refinery and sub-region specific.

"While both PADD 3 and PADD 5 refiners will also have to replace significant volumes Canadian crude, PADD 3 refiners probably could replace them more economically than PADD 5," he said, referring to the US Gulf Coast and the US West Coast, respectively.

"PADD 1 refiners might actually benefit a bit due to loss of competitive refined products now flowing into the region from Canada (primarily the Irving St. John and Valero Quebec City refineries)," he added, referring to the US Atlantic Coast.

Auers thinks Mexican tariffs wouldn't be as impactful on the US given the ability for the refiners currently depending on Mexican crudes like Maya to easily find other replacement crudes.

Landlocked Midwest

Refineries in the US Midwest, and to a lesser degree in the US Rockies, are in more of a quandary, given their landlocked location and inability to get heavy crude from the US Gulf Coast given the reversal of the Capline pipeline.

Capline, which once piped imported crudes north from Louisiana into the Midwest, was reversed in 2021 to give an outlet for landlocked heavy Canadian and other crudes to move USGC refineries and the export market.

As a result, much of the 4.3 million b/d of Midwest refining capacity is to some degree captive to Canada, particularly for the heavier grades of western Canadian crudes like WCS and Cold Lake. Regional refiners need these heavy crudes to run efficiently at high utilization rates.

Refiners respond

Two major US refiners – Valero Energy and Phillips 66 – pointed in recent earnings calls to the lack of detail from the White House.

"On the tariff question, I think, first of all, we don't know if we're going to have tariffs. But assuming that there are tariffs in Canada and Mexico, our view is that both markets will act a little bit differently," said Brian Mandell, head of Phillips 66's commercial team on the Jan. 31 Q4 results call.

"So we think tariffs in Canada, first thing that happens is TMX gets filled. The second thing that happens is, currently, the inventories are low, the inventories will start to fell," he added.

Mandel is referring to the newly-expanded Trans Mountain Express (TMX) pipeline which carries Alberta heavy crude to British Columbia where it is exported via water to the US West Coast as well as Asia and other global destinations.

"But ultimately, the differentials, the WCS differential, will widen to incentivize crude to move into the U.S. because crude actually has to move into the U.S. There's a lot of value in Canadian crude before there's any production cuts," he added.

Phillips 66 is one of the biggest importers of Canadian crude, given its Midwest refining profile, including its joint ownership of two US refineries with Canadian integrated Cenovus.

"We would expect to see the heavy crudes firm a bit just on the inefficiency of logistics. But as the year goes on and OPEC puts more barrels back on to the market, we would expect those differentials to widen back out," Mandel added.

Western Canadian Select at Hardisty, Alberta was assessed at a $13.85/b discount to WTI Jan. 31, down 10 cents on the day, and remaining in a well-worn range as traders waited for more details on the tariffs.

"We've been aware of this for a couple of months. And so our commercial teams and optimization teams have been working hard to develop every possible scenario we can think of and how we would respond to that," said Gary Simmons, Valero's chief operating officer on the Jan. 30 results call.

"Without having really clarity on what's going to happen ... there is no way we can really speculate on how we deal with it. We're just going to have to deal with it when it," he added.

Looking at different scenarios, Valero said refinery throughput could drop by 10% but does not expect run cuts to be much higher than that.

According to Simmons, the market expects calls for OPEC crude to increase in Q2 2025, putting an additional 180,000 b/d of medium sour crude on the market, which, along with the shutdown of the LyondellBasell Houston refinery, will increase supply of heavier crudes and be supportive of light-heavy crude differentials.

A key OPEC+ advisory committee is expected to recommend continuing with current production quotas until at least April.

Seasonal factors will also play a role in crude prices. Most refiners have divulged to some degree their refinery runs expectation for Q1, and heavy maintenance across their systems, which will reduce crude demand.

"But in reality, the discussions on sanctions and tariffs are really what's driving the market. And until we see some resolution to that, I don't expect any meaningful moves in the quality differentials," Simmons said.

Retaliatory actions

While US refiners look to Mexico and Canada for crude supplies, they also look to them as export markets for the gasoline, diesel and jet produced at their plants. Imposition of a tariff could spur retaliatory actions, making US exports less attractive.

"American refiners depend on crude oil from Canada and Mexico to produce the affordable, reliable fuels consumers count on every day. Therefore, we would hope any future tariffs would exclude these critical feedstocks and refined products," said Chet Thompson, president and CEO of refiner trade group, AFPM.

Auers noted that while Trump has said the US does not need Canadian crude, he has people in his administration who understand the US does.

"I think that's an advantage he has over what the Biden administration had. Biden administration did not put -- they did not talk to anybody -- certain didn't put anybody in administration that really understood the petroleum markets," Auers said.