WORLD: European and Asian refineries will benefit after Trump imposes new tariffs on Canada and Mexico
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New tariffs imposed by US President Donald Trump on oil imports from Canada and Mexico will give European and Asian refiners a competitive advantage over their US rivals, according to Reuters, citing several market analysts.
Trump on Saturday ordered tariffs of 25% on imports from Canada and Mexico and 10% on goods from China, measures that White House officials said were intended to address a national emergency related to fentanyl trafficking and illegal immigration. While Canadian energy products will only be subject to a 10% tariff, energy imports from Mexico will be hit by the full 25% tariff.
The tariffs on the two largest sources of US crude imports will raise the cost of the heavier grades of oil needed by US refiners for optimal production, which could reduce their profitability and even force some units to reduce production.
But this situation provides an opportunity for refiners in other regions to increase production and compensate for market differences. The US is currently a diesel exporter and a gasoline importer, which means that trade imbalances directly affect consumers and prices at the pump.
“Reducing US diesel exports would support refining margins in Europe, while potentially opening up more export opportunities in the already severely affected gasoline market,” said David Wech, chief economist at consultancy Vortexa. He added that “overall, this is a good thing for European refiners, but probably not for European consumers.”
A brokerage executive confirmed that European margins could rise as the US East Coast would have to import more gasoline. He concluded that “European and Asian refiners are the big winners from these tariffs.”
The impact of the tariffs will likely force affected oil producers to cut prices to find buyers. Matias Togni, founder of the analyst firm Next Barrel, said Asian refiners are well-positioned to absorb cheap Mexican and Canadian oil, which could boost their profit margins.
Asian refiners could also benefit because of their ability to process heavy crude and the high operating rates they maintain. Randy Hurburun, head of refining at Energy Aspects, explained that “Asian refiners are in a good position because of the equipment they need to process heavy crude and the fact that they are currently increasing their production rates.”
The expansion of Canada’s Trans Mountain (TMX) pipeline, completed in May 2023, now allows 590,000 barrels per day to be transported to Canada’s Pacific Coast, meaning Canadian oil could more easily reach Asian markets, offsetting potential cuts in imports from Venezuela and Saudi Arabia.
In addition, refiners in the Asia-Pacific region could take advantage of arbitrage opportunities for fuel to the U.S. West Coast, where higher raw material costs could reduce local supply.
While refiners in the U.S. Midwest are likely to continue buying Canadian crude even with the additional taxes, the costs will be passed on to consumers, Reuters reports. Stewart Glickman, a market analyst at CFRA Research, warned that “Americans in the Midwest could pay 20 to 25 cents more per gallon for gasoline.”
Imports of crude oil from Canada and Mexico accounted for about 28% of total U.S. refining in 2023, according to data from the Energy Information Administration (EIA).
Refineries in the U.S., particularly in the Midwest, are dependent on Canadian oil, and their ability to substitute this type of crude with U.S. WTI light is limited due to compositional differences between the two grades.
Neil Crosby, an analyst at Sparta Commodities, explained that “U.S. refiners cannot easily replace Canadian and Mexican crude with WTI because they require specific residual fuels.” While some U.S. refiners have made improvements to process more light oil, this would lead to underutilization of secondary units, affecting both efficiency and profitability of refineries.v “Any disruption to the crude supply system inevitably leads to higher costs,” explained John England, global leader in oil and gas at Deloitte.
Canadian oil imports into the U.S. hit a record high in the first week of January, according to the EIA, indicating that U.S. refiners were trying to ramp up purchases ahead of the new tariffs. Imports have since eased slightly, standing at 3.72 million barrels per day in the week ended Jan. 24, but remain high compared with a year ago.
Meanwhile, U.S. refiners have already begun to see profits fall from record highs in 2022. Oil giant Chevron, for example, reported fourth-quarter results that missed Wall Street expectations after weak margins sent its refining division into a loss for the first time since 2020.
Taxes imposed by the Trump administration and rising raw material costs could further reduce the profitability of U.S. refiners, making them less competitive in the global market. Neil Crosby, an analyst at Sparta Commodities, concluded that “the imposition of tariffs on Mexican and Canadian oil is extremely difficult for the U.S. refining industry to compete.”
