Trump’s oil tariffs a boost for European and Asian refiners

LONDON/HOUSTON - US President Donald Trump’s

trade tariffs on Canadian and Mexican oil imports

will offer European and Asian refineries a competitive advantage against their US rivals, analysts and market participants told Reuters.

Mr Trump on Feb 1 ordered tariffs of 25 per cent on Canadian and Mexican imports, and 10 per cent on goods from China, starting on Feb 4 to address a national emergency over fentanyl and illegal aliens entering the US, White House officials said.

Energy products from Canada will have only a 10 per cent duty, but Mexican energy imports will be charged the full 25 per cent, they said.

The tariffs on the two biggest sources of US crude imports will raise costs for the heavier crude grades that US refineries need for optimum production, industry sources said, cutting their profitability and potentially forcing production cuts.

That provides refiners in other markets an opportunity to make up the difference. The US is currently an exporter of diesel and importer of petrol.

“Less US diesel exports would support European margins, while more export opportunities may remain in the strongly pressured petrol market,” said Mr David Wech, chief economist at consultancy Vortexa. “So overall, a positive for European refiners, but likely not for European consumers.”

An executive at a brokerage said: “European margins may improve because the US North-east will have to import more petrol. I think European and Asian refiners are the big winners.”

Tariffs would also likely force impacted crude sellers to discount prices to find buyers, said Mr Matias Togni, founder of analytics firm Next Barrel. Asian refiners are well poised to soak up that discounted Mexican and Canadian crude, something that could also buoy their profit margins, he added.

Asian refiners could get the competitive advantage because they have the equipment to run heavy crudes and are also in the midst of raising their run rates, said Energy Aspects’ head of refining Randy Hurburun.

The Trans Mountain pipeline expansion (TMX) in Canada, which was launched last May, means the pipeline can now ship an extra 590,000 barrels a day to the Canadian Pacific Coast.

Higher TMX shipments to China could substitute imports from Venezuela and Saudi Arabia, trading sources said.

Asia-Pacific refiners could also exploit fuel arbitrage opportunities to the US West Coast, which might be hit by higher feedstock costs incurred from sourcing crude from farther afield, Mr Wech added.

To be sure, there are expectations that Midwest refiners will continue to buy Canadian crude, even with the tariff, and could simply pass the costs on to their customers at the pump.

CFRA Research equity research analyst Stewart Glickman said: “Folks in the Midwest could look forward to spending an extra 20 or 25 cents a gallon.”

US feedstock conundrum

Canadian and Mexican crude accounted for around 28 per cent of US refiners’ crude diet in 2023, Energy Information Administration (EIA) data showed, with inland refineries in the Midwest especially reliant on Canadian barrels.

US refiners’ ability to run a more abundant supply of light US West Texas Intermediate (WTI) crude in place of Canadian and Mexican oil will be limited because of their different qualities, analysts said.

Sparta Commodities analyst Neil Crosby said: “More use of WTI in domestic refiners is probably limited in scope; they really need the residual fuels.”

Although some US refineries have completed upgrades to process more light crudes, this would lead to an underloading of secondary units, weighing on both economics and efficiency, said Energy Aspects’ Mr Hurburun.

Mr John England, Deloitte’s global sector leader for oil, gas and chemicals, said: “When you put friction in the system, and particularly around crude optimisation for a refiner, you’re likely to come up with higher costs as a result.”

US imports of Canadian crude hit their highest on record in the week to Jan 3, according to the EIA, a potential sign of refiners stocking up with tariffs looming. Imports have slipped slightly since, last at 3.72 million barrels per day in the week to Jan 24, but remain elevated on the year according to the EIA.

Meanwhile, US refiners have already seen earnings slide from record levels in 2022. Oil major Chevron, for example, reported fourth-quarter earnings below Wall Street estimates, after weak margins dragged its refining business into a loss for the first time since 2020.

Tariffs and subsequently higher prices could further impinge on US refiners’ ability to turn a solid profit.

Sparta’s Mr Crosby said: “The mechanics of putting tariffs on Mexico and Canada are very tricky for competitiveness of the US system.” REUTERS