Trump’s Energy Tariffs Are Set to Spark a Redrawing of Oil Flows
(Bloomberg) -- The world’s supply lines for cargoes of oil and fuel, which typically criss-cross the globe, are about to get redrawn thanks to US President Donald Trump’s sweeping tariffs.
Crude from Mexico, which supplies US Gulf refiners, will be diverted away, said Isabelle Gilks of consultant Wood Mackenzie Ltd. And if the duties endure, tariff-free Latin American oil grades from places like Brazil will start to head to the US in greater quantities, along with possibly more supplies from the Middle East, said Kitt Haines, an analyst at Energy Aspects Ltd.
Meanwhile, US East Coast fuel buyers will need to turn to Europe’s refiners to replace some Canada supplies, according to Eugene Lindell of consultant FGE.
The shifts signal the biggest restructuring of crude and fuel trade flows since the aftermath of Russia’s invasion of Ukraine, and the effects will ripple through global markets.
Already, the spread between West Texas Intermediate oil and global benchmark Brent crude has significantly narrowed as traders deem that the US needs higher prices to attract shipments. Brent, meanwhile, cratered below $70 a barrel for the first time since October on concerns over a surplus in markets outside the US. Traders are positioning for more turmoil and paying premiums for bearish Brent options, even as speculation ramps up that prices within the US will rise for gasoline and other fuels.
“Tariffs will increase US inflation no matter how you look at it — this is impacting consumer confidence,” said Jorge Leon, head of geopolitical analysis at consultant Rystad Energy.
America is currently the world’s top oil producer, with output continuously hitting records on the back of prolific shale basins. But even then, oil imports still play a vital role in the country’s energy supply. That’s partly because US refiners rely on the crude grades produced by Canada and Mexico to make gasoline and other fuels — the neighboring countries represent more than two-thirds of all American refiners’ oil imports. Canadian imports are now subject to a 10% levy, while those from Mexico face a 25% charge.
Higher Costs
US refiners are now likely to pass on the cost of the higher oil to consumers, who will bear the brunt by spending more at the pump.
“The United States is energy secure in part because of our trade relationships with Canada and Mexico,” Chet Thompson, the Chief Executive Officer of the American Fuel & Petrochemical Manufacturers, said in a statement Tuesday. “Imposing tariffs on energy, refined products and petrochemical imports will not make us more energy secure or lower costs for consumers.”
Canada’s oil flows may see the least disruption, with the lower tariff rate at 10%. Still, more barrels will likely now start to flow on the recently expanded pipeline that sends supplies to the country’s west coast. Canadian oil producers will likely divert about 200,000 barrels per day away from the US to international markets via the TMX pipeline in the short term, said Rob Thummel, senior portfolio manager at Tortoise Capital.
Western Canadian Select, or WCS, oil prices got weaker Tuesday, on concern over demand for the nation’s shipments into the US.
Meanwhile, some fuel supplies typically sent from Canada into the US will become “uneconomical,” said Lindell, head of refined products at FGE. East Coast Canada diesel now points to Europe instead of New York — flow re-routing looks likely, according to Neil Crosby, an analyst at Sparta Commodities.
There’s also set to be a broader impact on markets for sludgy, sulfurous barrels known as high sulfur fuel oil. Tariffs on Mexico and Canada will make it too expensive to send supplies to the US, meaning about 260,000 barrels a day will have to be diverted away, according to FGE. In Europe, these barrels are at their most expensive relative to crude since 2019, on a seasonal basis.
Some Mexican oil exports that typically go to the US will be diverted because of the 25% tariff, Gilks a principal analyst at Wood Mackenzie said by email.
“Refiners on the US Gulf Coast will become less competitive as the cost of feedstock rises and they have to look elsewhere for heavy barrels,” Gilks said.