Trump tariffs highlight US refiner dependence on Mexico and Canada

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Jeff Mower:

Hello and welcome to the Oil Markets Podcast by S&P Global Commodity Insights. Today we'll be discussing how US tariffs on energy imports from Canada and Mexico are impacting petroleum markets. I am Jeff Mower, director of America's Oil News, and I'm joined today by senior editor and refining guru, Janet McGurty and crude price editor, Jada Johnson. Welcome both of you. US president Donald Trump imposed a 25% tariff on all imports from Mexico and a 10% tariff on energy imports from Canada, saying the two countries have failed to curb "dangerous cartel activity" and an influx of lethal drugs flowing into the US. Both countries are major suppliers of crude to the US. The US imported 4.23 million barrels a day of Canadian crude in December and 451,000 barrels a day of Mexican crude according to the US Energy Information Administration. And something we don't hear too often in the general press, but we will likely hear more of, Canada is also a major supplier of refined products to the US, specifically to the US Atlantic Coast. Canada exported around 428,000 barrels a day to the Atlantic Coast in December, for instance.

So let's talk about those refined products first and first, I should note these tariffs state, they went into effect on March 4th, and as we're recording this, March 5th, we're already hearing signals that maybe Trump will revise those tariffs. So this is really a moving target, a developing story, and I think it's going to keep developing for quite some time anyway. So Janet, let's go with you first. How important are those refined products imports to the Atlantic Coast from Canada, and why is the Atlantic Coast so dependent on Canada for those refined products?

Janet McGurty:

Well, the reason why the US Atlantic Coast is so dependent on Canada is that we don't have enough refinery capacity in the US to meet demand for the Pad One or the US Atlantic coast. So because we had a big shutdown back in 2011 and 2012, and then we've just lost refining capacity. So Irving is right up in The Maritimes in Canada, and they have the largest refinery there in St. John. So they have been the supplier of, at least to what we call Pad 1A, which is the New England states. They are the main supplier there. So the changed economics brought on by the tariff is going to just create a whole slew of changes of flow. It's going to be like the domino effect, you knock one and it's just going to ripple through the system.

But a prolonged interruption of Canadian refined products, imports will definitely disrupt US product markets. But again, it will depend on the region. Now, on the US East Coast, most comes from Irving and it goes into Massachusetts, Maine, Connecticut, but mostly in the New England states. So the US imports about 565 barrels per day of refined products from Canada, mostly the East Coast, but it also brings in about 165,000 barrels per day from Mexico as well. And that also includes things like fuel oil that refiners run.

Jeff Mower:

Now have you seen a price reaction, any kind of price reaction in Atlantic Coast refined products since the Teraflux?

Janet McGurty:

We have seen, I'll tell you. Yeah. And CBOB and RBOB on the Atlantic Coast moved up slightly about 2 cents yesterday for both. So on gasoline, the RBOB differential was about 2 cents. But the RBOB contract on the Nimex, the differential was up 2 cents. But the Nimex contract RBOB was about only 64% higher. All right. And ULSD diesel, Nimex, was 3 cents higher yesterday. And what happened was then the diesel ULSD cash was slightly weaker on that.

But Irving already sent out to their heating oil customers in New England notice that they're raising the price for just as much as the tariff would be. So some analysts and some people I've been talking say, "We'd probably increase prices about $8 a barrel for both gasoline and diesel." So that would be about 20 cents a gallon, right? So that's not such a big deal. But the thing with Irving too is that, so Irving is privately held, but they also have a very robust logistic networks in the US as well as in Eastern Canada. They're the largest private landowner in Maine. So we need their gasoline. Again, it's very close. It's a day trip from New Brunswick, Canada down to Rhode Island or Boston or Maine Market. But the problem is that because Irving has such a robust logistics network, they supply it with their own product.

So what is their product going to do if they don't send gasoline diesel to the US, it's going to have to go to Europe, right. Now, we can get more gasoline from Northwest European refiners 'cause they're long gasoline struck for loop, but they short diesel and they import it. And a study that I read that was done by our analytics team, they were saying that it would be a prolonged disruption, diesel would be hurt worst is what they're saying because again, it's hard to get it. But now on the other side, we have changes of things like we have new capacity coming online from Nigeria, refining capacity. So it's just going to be a matter of shifting flows and will impact, and that'll be, so again, shifting flows. If you have to travel more, that'll cost more in travel. There's a whole lot of different things.

Jeff Mower:

Yeah, I was going to ask you, are there any projects in the works that would reduce the Atlantic Coast dependence on Canadian imports?

Janet McGurty:

So it was always kind of felt that if you have to depend on someone for your gasoline and diesel, Canada is where you want to be-

Jeff Mower:

Sure.

Janet McGurty:

Because it's so close. Again, and Irving's Refinery, really, it's the largest in Canada, 320,000 barrels per day in St. John, New Brunswick. And they export over half of their, more than that I think, let me see. But they export a massive, I mean, most of their product. They do supply some Canadian markets, but it's mostly into US. So it's going to be a problem for them. They'll find a place for it. So it's a little too early days. And again, like we were speaking about earlier, and I think a lot of people feel this is that no one's quite sure this tariff thing is going to have legs, it's going to have life. It's not going to be over soon.

So there have been some shuffling of assets over the past year or so, mostly with storage facilities, Global Partners bought Exxon Mobiles, Providence, Rhode Island, a million barrels of storage there from Exxon. So we're going to be seeing things like that because storage will become more important, but we're not really seeing anything yet. And again, the thing with storage is that in places where it is like there's mature markets like Providence, Rhode Island being like, there's not a lot of space to put storage there.

Jeff Mower:

You can only bring up so much refined products on the colonial pipeline from the Gulf Coast. Isn't there also this Laurel Pipeline project, would that be something that would deliver more products from the Midwest?

Janet McGurty:

Yes, it would. So back in 2019, Buckeye, which owns the Laurel Pipeline, which runs from, I guess like Detroit now into just the Pittsburgh area in Pennsylvania. So that's what it got in 2019. It was able to increase its flow market share because the Midwest refiners, their barrels are landlocked, so they can't really move them many places. So that's why they want the East Coast. They would like that. Well, they've been trying to do this for a while. The other thing is that though, so this is now a filing with FERC, it's in litigation with Monroe Energy, which owns the Trainer Refinery outside of Philly, that's the Delta one, and PBF, which owns refinery in Delaware City and a refinery in Paulsboro, New Jersey. So they have filed with FERC and with the Pennsylvania Utility Commission to try to stop this from happening. So that would increase flow, but again, the knock-on effect of that, that's going to threaten refining capacity on the East coast as well, so-

Jeff Mower:

I see. Yeah, I see what you mean.

Janet McGurty:

Yeah.

Jeff Mower:

Yeah. So Jada, the 10% tariff on Canada, I think the Trump administration was already acknowledging the dependence of US refiners, especially on the Midwest, on Canadian crude by setting a 10% tariff on Canadian barrels and not 25%. Is the market expecting, I know it's still early now, but is the market expecting those tariffs to lead to any supply shifts, or do you think that producers and refiners will just eat the cost of that 10% tariff?

Jada Johnson:

Yeah, it's an interesting question. And I think that the seriousness with which the market has taken, the threat of these tariffs fluctuates daily. And so with US Midwest refiners that are mostly getting their crude from Canada, they're logistically and geographically confined and constrained to pipelines of crude coming out of Canada. And in theory, they could import crude from the US Gulf Coast or Atlantic Coast, or they could switch to lighter barrels. But I think with that reliance, we're looking at sort of a shift in the flows of crude coming out of Canada. I think in terms of who eats the cost, people disagree, but the wisdom would show that producers likely will.

Jeff Mower:

Yeah, we already saw some impact on price differentials, right?

Jada Johnson:

Yeah. Yeah.

Jeff Mower:

It is kind of reflecting that.

Jada Johnson:

Just as of yesterday, yesterday being March 4th, Canadian crude fell off by as much as a dollar per barrel. While on the US Gulf Coast we saw some heavy crude come up by nearly the same amount or more. And so we're already seeing that shift, but obviously these things can change.

Jeff Mower:

Because it's like, as you were saying, Midwest, you're really constrained. You don't really have pipeline access. You do have pipelines that move crude into the Midwest from the Gulf. It is more like light sweet crude, right. It's really difficult unless you were to reverse cap line again. Cap line is a big pipeline that used to move crude. I'm trying to think what was originally designed for, would move crude north from the Gulf for bringing imports, and it was switched to move crude south for exports. And now the idea, maybe you could switch it again, but it seems like you would need to have a longer term plan, not just, oh, there's some tariffs in place-

Jada Johnson:

Exactly.

Jeff Mower:

Now, so we're going to start flipping this thing back and forth. Yeah, the Canadian Association of Petroleum Producers came out yesterday and said, they were responding to the tariffs, and they said, "We'd really more pipelines so that we could reach markets outside of the US." It's sort of a wake-up call for them. I thought that was interesting. But at the same time, they've been arguing that for a long time. Janet, from our refiner's perspective, how much leeway do they have to switch crudes? I mean, let's say you wanted your Midwest refiner and you want to switch to run more light crude, some more TI. What's the impact of that?

Janet McGurty:

Well, so the refiners in the Midwest and in the Gulf Coast bolt up their coking capacity to run heavier, cheaper crudes from Canada in expectation of the Keystone XL, which we know never happened, but there's still plenty of Canadian crude coming down this way, heavy Canadian crude. So they're built that way. So if they're going to owe anything they rent, even if they run Latin American crude in the Gulf refineries or California refineries or in the Pacific Northwest refiners, they're going to be running something lighter than they would've run from WCS or the Canadian crude. So that's going to be a yield impact. So the refinery is not going to be as efficient. It's going to cut back on margins slightly. It'll have an impact there.

So Midwest refiners really, I kind of get the sense they're biting the bullet here, and 10% isn't so bad when you look at the differential of WCS, to Brent or TI. So they're thinking it's doable. Some say, "Oh, the producers will be paying it." Some say, "Oh no, but we'll eat it." But I think it will come down to some combination thereof. It probably the individual. I mean, it's like with Wrens, we saw with Wrens, you when they started doing, who's going to pay for it? We know this is how it's supposed to be, but everyone ends up taking apart of it. So I think we're going to see that the same thing with this if it goes through.

Jeff Mower:

Sure. So Jada, how about the tariff on Mexican crude? I mean, that's pretty steep, 25%, and I know Mexican crude goes to the Gulf Coast and to West Coast refiners. Are we seeing any signs that those refiners are seeking replacement grades or is it still too early?

Jada Johnson:

Yeah, so US Gulf Coast refiners clearly have a preference for heavy sour crudes coming out of Mexico and Canada but if the price is going up on those, they're looking at less Mexican and Canadian crude. And with Venezuela no longer being an option, we've seen Colombian grades get to the highest differentials in many years just on tariff hype, as we've heard from the market.

Jeff Mower:

That's right. That's been going on for a while, right?

Jada Johnson:

Yeah, yeah.

Jeff Mower:

The Vasconia, and-

Jada Johnson:

Exactly. So yeah, just going back to even when the tariffs were initially announced, we've seen that gradual increase out of Colombia in terms of their differentials and then coming out of Latin America, there aren't that many other places to turn to. And looking at heavy sours, there's talk that Ecuador could serve as a potential option, but then you face the logistic freight issues of the Panama Canal or going around the entire continent of South America, which just makes that quite logistically difficult.

Jeff Mower:

Why is the Panama Canal an obstacle?

Jada Johnson:

So with the demand on the US Gulf Coast being quite high, only small ships, like Panamaxes are allowed to cross that canal. And with Ecuador being on the western coast of South America and trying to get to the US Gulf Coast, that's the shortest option. But when you're trying to get millions of barrels on these little ships up to the US Gulf coast, you face the issue of how much is this going to cost and at what point is the price of the Ecuadorian barrels good enough to want to bring those barrels to the US Gulf Coast?

Jeff Mower:

Yeah, I guess that all depends on your margin at the end of the day as far as the refiners go. The other thing to note about the Panama canals, we've seen, well, at least back in 2023, a drought that triggered a lot of restrictions on the route. It's something to keep in mind when you're talking about moving through the canal. It looks like so far in 2000, well, 2024, 2025, things did improve, but it's always a concern. And like you mentioned the impact on some of those Colombian crudes, and you'd also mentioned earlier an impact on, I want to say Mars, right? We've seen an impact on Mars crude, offshore Gulf. You mentioned Venezuela, I thought that was interesting. We don't really track Venezuelan crude prices. We don't really have, correct me if I'm wrong, like a spa market there. But what is the issue with Venezuelan crude? I mean for a while we were getting more Venezuelan crude because Chevron had a licensed stop operate there. We saw production reach a million barrels a day, by the way, in February. So what's the issue with Venezuela now?

Jada Johnson:

Yeah, I mean, with the license now being essentially revoked, transactions are going to stop come April 3rd, I believe. If that crude doesn't go into the US Gulf Coast, refineries are constrained again and looking for heavy sours, which tends to be their preference coming out of Latin America. And so you have this shift in crude flows and at least coming up from South America, I think that there's the potential for looking at Colombia or looking at Ecuador, but it's not necessarily clear where refiners are going to, what they're going to choose in the long term.

Jeff Mower:

See, the crude imports from Venezuela are no joke. I mean, considering that the limited availability of that heavy crude for Gulf Coast refiners.

Jada Johnson:

Yeah, I think what's interesting about Venezuela is that US imports around 250,000 barrels per day, which isn't nothing. And so it's a significant amount when you're looking at putting tariffs on Mexico in Canada. So you'll see refiners likely start to scramble for Colombian crude or even a heavier Guyana crude like Payara Gold or potentially Hebron from East Coast, Canada could also see an uptick.

Janet McGurty:

Well, we've already seen an uptick in Hebron and Hibernia to the Gulf because Bayway runs that in the East Coast, and so they'll be impacted by that. But we've already seen it at the beginning of January, right when Trump took office. And I'm just wondering if people were stockpiling it down there. It seemed like there was a huge flow moving that one. Interesting to see how those change.

Jeff Mower:

Yeah, it's interesting. There was on the Venezuela front, I think I was expecting initially, I know some other people were expecting too, that we saw signs that the Trump administration was being more diplomatic in Venezuela, and they had negotiated the release or the return of some Venezuelans back into the country. And so the expectation was maybe that license will be extended. And I think Chevron was the first company during earnings to come out and call the Gulf of Mexico, the Gulf of America. And there was sort of a joke, right? It's like, oh, they're going to get their license extended now. But it's like, well, Trump administration will surprise you, right? I thought that was really interesting.

Jada Johnson:

Yeah. And I think initially the market reacted in a way where they're like, "Oh, even though the license is going to be revoked, it' six months out." But then with the reversal and with General license 41A, we see that deadline being pushed up. And so now there is this rush to figure out where are we going to get this crude from?

Jeff Mower:

Yeah, interesting. See, I mean, OPEC saying they're going to start boosting crude output soon a bit. And I think Iraq, right, then Iraq want to start moving more crude. They're in talks with Turkey over the start of some Kurdish crude exports. And I think that might help out as far as I know we get some Iraqi crude on the West Coast, I want to say, and maybe the Gulf Coast as well, but that's a bit down the road. But anyway, there's plenty of to track. And like we were talking about before, this is really a moving target. These tariffs could be pulled today, they could be reenacted in a month from now. We will see.

So really make sure to keep following us, make sure you're getting the latest from us on Platts Connect. And also I'll be up Zero Week, which starts March 10th, and I hope to see everyone there. Registration is underway right now, run out of time. So register by going to the link in our show notes. And thank you Janet and Jada for joining me. And thanks again to our listeners for tuning into this episode of the Platts Oil Markets Podcast. This oil markets episode was produced by Jennifer Pedrick in Houston.