Oil market in spotlight due to US President Donald Trump tariff narrative
Trump announced over the weekend that on Tuesday, a 25% tariff would be imposed on imports from Canada, Mexico and China and a tariff of 10% on imports from China.
Trump has suspended tariffs on Canada and Mexico until the end of the month, after the two countries have agreed to do more to curb drug trafficking at the US-Mexico border.
Energy imports from Canada were subject to a 10% tariff reduction.
Carsten Fritsch said that Canada was the US’s largest oil supplier.
According to the US Energy Information Administration, more than four million barrels per day of crude oil imported by the US came from Canada last year.
This is more than 60% the total US crude imports. Fritsch stated that Mexico was responsible for around 470 000 barrels of crude oil per day, or about 7%.
Find other suppliers is difficult
Experts say that finding alternative sources for crude oil imports to Canada and Mexico was very difficult.
Rohit Rathod, Vortexa’s senior analyst of the oil market at ICD said: “The US Midwest refinery system is facing a major challenge as it relies heavily on Canadian crude. It also does not have sufficient access to US Gulf Coast barrels for replacement.”
Rathod:
It will also lead to increased gasoline prices on these markets, and lower refinery margins which could result in refineries closing. This will make it difficult for Canadian crude to be replaced in these markets.
Due to the similarity in quality and proximity, oil from Venezuela can be substituted.
Trump announced the US decision to stop buying oil from Venezuela shortly after taking office.
Commerzbank reports that the US imported 220,000 barrels of oil per day from Venezuela in 2010. This will also need to be replaced.
Brazil and Guyana may also be able to supply the US with heavy oil rich in sulphur.
During the first 11 months of 2011, these countries delivered 220,000 barrels and 180,000 each day to the US.
It is unlikely that the imports of these countries will increase significantly in a relatively short time. Fritsch stated that this would at best have compensated imports of Mexico which were subjected to a 25 percent tariff.
Reduced purchases by refineries
According to Commerzbank, US refineries could have reduced their crude oil purchase from Canada and Mexico in order to avoid tariffs.
It could have led to a US crude oil shortage, and there would be less processing of crude oil.
The US refineries also passed the higher costs associated with imported crude oil, from Canada and Mexico, on to US customers through increased gasoline prices.
US oil exports could also have been reduced. The US exports an average of 3.2 million barrels per day of refined petroleum product in the first 11 months of the year.
Every day, nearly 1.3 million gallons of diesel fuel and 800 000 gallons of gasoline are consumed.
The US is also a major diesel supplier to Europe, after the EU’s import ban on diesel in 2023 halted shipments of diesel from Russia. Fritsch stated that import tariffs could lead to an insufficient supply of diesel fuel for Europe.
If a solution permanent isn’t found in 30 days, tariffs may be re-instituted against Canada and Mexico.
The motto “postponed, but not cancelled” applies until then.
Sanctions against Iran
The bullish crude oil price movement in the second half of the trading session on Tuesday was due to President Trump’s order to intensify economic pressure against Iran.
In a recent note, Warren Patterson, chief of commodities strategy for ING Group said that this move should not be a big surprise, given the fact that Trump had been hawkish toward Iran in his first term, and had reimposed sanctions on Iran at the time.
Biden’s administration never formally revoked the sanctions against Iran.
Nevertheless, these sanctions were relaxed in response to the Russian invasion.
Patterson stated that a stricter enforcement of the law could put up to 1m b/d in supply at risk.
Reduced Iranian oil flows will not lower the price of crude, which is something President Trump wants to do.
Trump has advocated publicly for a higher oil production by OPEC in order to mitigate any potential global impact from Iranian oil loss.
It may be difficult to convince key OPEC countries like Saudi Arabia that they should increase production in order to maintain current prices.
This difficulty is caused by a number of factors. Saudi Arabia, and perhaps other OPEC countries may not want to raise production if the current prices of oil are enough to cover their needs.
They may also be concerned about oversupply, as this could cause a drop in price and impact negatively on their revenues.
OPEC+ will increase their production by a small amount from April, when they are expected to unwind some voluntary production reductions of 2.2 millions barrels per days.
What are US options in the event that Canadian oil imports cease? This post may change as new information becomes available
