Oil prices jumped on Monday after the US President Donald Trump imposed tariffs on Canada and Mexico, which raised concerns over supply disruptions.
As Canada exports nearly all of its crude oil to the US, it makes the country one of the major suppliers of oil to the world’s biggest economy.
The imposition of tariffs could have a major impact in the longer term with demand slowing for oil, while making domestic fuel prices expensive for consumers.
Sweeping tariffs
Trump imposed sweeping tariffs against Canada, Mexico and China on Saturday.
But, tariffs on energy imports from Canada were less aggressive in nature.
White House officials revealed that energy products imported from Canada will be subject to a reduced duty of only 10%.
This preferential treatment stands in stark contrast to the tariffs imposed on Mexican energy imports, which will be charged the full 25% duty.
This policy decision highlights a significant difference in the US approach to energy trade with its two neighboring countries.
While Canadian energy products will enjoy a competitive advantage in the US market due to the lower tariff, Mexican energy imports will face a higher cost barrier.
The reasons behind this discrepancy in tariff rates could be multifaceted, potentially encompassing factors such as existing trade agreements, energy security concerns, and political considerations.
The impact of this policy on the energy markets of all three countries remains to be seen.
This could also have implications for energy prices and consumer costs in the US, as well as for the energy industries and economies of Canada and Mexico.
Difficult to replace Canadian oil imports
The US imports approximately 4 million barrels of oil per day from Canada, which constitutes 61% of its total crude imports and establishes Canada as a major supplier.
“This crude oil is a heavier crude, which many US refineries are configured to run on, particularly in the Mid-West. Given the importance of Canadian oil to the US, it is not surprising to see that WTI is trading stronger this morning,” Warren Patterson, head of commodities strategy at ING Group, said.
The tariffs will theoretically result in US refiners paying more for feedstock, and these costs will eventually be passed on to consumers.
However, it is unlikely that US refiners and consumers will bear the entire cost of the tariff.
Also, analysts at Commerzbank AG said it would be difficult for the US to replace Canadian oil.
Canada accounted for 4.08 million barrels a day and Mexico for 478,000 barrels per day of the total barrels imported in the first eight months this year, the data showed.
“Canada is therefore by far the US’s most important oil supplier, Mexico ranks second,” Carsten Fritsch, commodity analyst at Commerzbank AG, said.
Due to the lack of alternative export markets and the fact that 97% of Canadian oil exports were sent to the US in 2023, it is probable that West Canada Select prices will decline, widening the differential to West Texas Intermediate, the benchmark US crude price.
“If Canada had a more sizeable export infrastructure allowing it to export to other external markets, Canadian oil producers would feel less pain from these tariffs,” Patterson said.
There is 890k b/d of pipeline capacity (Trans Mountain pipeline) from Alberta to the West Coast of Canada, allowing Canadian crude to be exported to other markets, and we are likely to see more of this pipeline capacity used once tariffs are imposed.
Canadian oil producers are likely to be impacted more severely by these tariffs than US refiners, due to the lack of alternative options for Canadian producers, according to Patterson.
Slowdown in demand in the long term
Moreover, over a longer period of time, tariffs could lead to an escalated trade war between the two countries.
This comes at a time when crude oil demand had remained subdued over the last year.
Additionally, experts anticipate that oil demand is likely to peak in China, the top importing nation, over the next couple of years.
The increase in the number of electric vehicles and an urgent need to shift away from fossil fuels will eat into oil’s share in the energy mix.
Patterson said:
More broadly, an escalation in trade tensions is not supportive for risk assets with it souring sentiment and raising concerns over the impact it could have on global growth, which means the strength in crude oil prices may be short-lived.
The strength in the USD will also likely provide some headwinds not just for oil but the broader commodities complex.
At the time of writing, the price of WTI crude oil on the New York Mercantile Exchange was $74.43 per barrel, up 2.4% from the previous close. Brent crude oil on the Intercontinental Exchange was at $76.93 per barrel, up 1.7%.
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