The looming threat of a 25% import tariff on Canadian and Mexican crude oil, a possibility raised by President-elect Donald Trump, has sent ripples of uncertainty through the global energy market. Industry analysts and traders warn that such a move would force oil producers in both countries to drastically adjust their strategies, potentially leading to lower prices and a significant redirection of oil shipments towards Asia.
Two sources close to Trump’s transition team have confirmed to Reuters that oil is not exempt from the potential tariff hikes targeting imports from Canada and Mexico. This is despite strong warnings from the US oil industry highlighting the potentially devastating consequences for consumers, the industry itself, and national security. The stakes are high: Canada and Mexico supply a substantial portion of the US’s crude oil imports, contributing 52% and 11%, respectively, according to data from the US Energy Information Administration (EIA).
The dependence is further emphasized by Kpler’s ship tracking data, revealing that the US accounts for a significant portion of waterborne crude exports from both countries – 61% from Canada and 56% from Mexico. The situation is further complicated by the recent surge in Canadian waterborne crude exports, a 65% increase to approximately 530,000 barrels per day (bpd) in 2024, fueled by the expansion of the Trans-Mountain pipeline. This pipeline expansion increased shipment capacity to both the US and Asia.
Goldman Sachs’ co-head of global commodities research, Daan Struyven, points out the potential challenges facing Canadian producers: “If they face export constraints and are unable to re-route barrels previously exported to the US to other markets, they may face deeper discounts and suffer revenue losses.” The impact would be particularly pronounced on heavy, high-sulphur crude, the primary type exported by both Canada and Mexico. This type of crude is primarily processed by complex refineries, many of which are located in the US and Asia.
“The impact is all on the heavy grades,” explains a Singapore-based trader. “What are the US refiners going to do? Even Saudi Arabian heavy crude is limited.” The limited options for US refiners, some of which rely solely on pipelines for crude delivery, further complicates the situation. The trader notes that “either the producer or the refiner will have to absorb the tariffs.” This means Canadian producers will likely have to offer significant discounts to attract Asian refiners while also covering the increased costs of long-distance shipping.
Several Asian refining sources and analysts anticipate a surge in Canadian and Mexican oil flows to Asia in response to potential tariffs. LSEG analyst Anh Pham states, “We are likely to see quite some volume going to China and India, where refiners’ configurations are able to refine the crude.” This shift is already underway, with increased TMX exports to Asia in recent months as Asian refiners, particularly Chinese processors, test new grades. However, it’s important to note that Mexican exports to Asia are currently down 21% to approximately 860,000 bpd this year.
The picture for European refiners is less clear. Energy Aspects analyst Christopher Haines suggests that while tariffs on Mexican oil might create opportunities for some Spanish refiners, Asia is better positioned to absorb any surplus volumes not sold to the US Gulf. European refiners generally import limited quantities of Canadian crude. Currently, Mexican crude exports to Europe average about 191,000 bpd, with 81% going to Spain, while Canadian flows are significantly lower at 85,000 bpd.
Despite the serious implications, some traders and Goldman Sachs analysts remain skeptical about Trump actually imposing the tariffs. The potential negative effects on US consumers and refiners through increased inflation could be a significant deterrent. Trump has historically used the threat of tariffs as a negotiating tactic, and the actual implementation remains uncertain. However, the very existence of this possibility presents significant challenges to the stability and predictability of North American energy markets. The next few months will be crucial in determining the final impact of this potential policy shift.
