In a recent turn of events, the United States has signed an executive order imposing tariffs on imported goods from Canada and MexicoThis decision has extended to energy products, which are now also facing enhanced financial burdensConsequently, there are growing concerns that international oil prices may be subject to further downward pressure as these developments unfold.

The new tariffs include a steep 25% on various imported goods from both Canada and Mexico, alongside a 10% levy specifically targeting energy resources coming from CanadaThese changes signal a notable shift in trade relations and usher in a new era of economic challenges for both neighboring countries.

Prime Minister Justin Trudeau, on February 1, publicly conveyed his discontent regarding the tariffs during a meeting with provincial premiers and his cabinetTrudeau expressed that while Canada did not desire to face such trade barriers, it stood ready to respond appropriatelyHe scheduled an address later that evening to inform the Canadian public about the evolving situation, highlighting the urgency with which this matter must be handled.

The Canadian Association of Petroleum Producers, a key trade group, has emphasized the unpredictability surrounding the tariffs' impact on supply chains, demand, and overall trade patternsLisa Baiton, the association's president, issued a statement lamenting the negative consequences of the tariffs, asserting that “these tariffs undermine our mutually beneficial relationship, potentially increasing costs for American consumers and inflation, whilst simultaneously damaging the economies of both nations.”

As this news broke, crude oil prices reacted to the unfolding situationBrent crude oil saw an increase of 0.7%, reaching $76.42 per barrel, while West Texas Intermediate (WTI) crude oil rose by 1.47%, hitting $72.80. However, it’s crucial to note that crude prices have been on a downward trend, having decreased by 2.1% and 2.9% respectively over the previous week, marking a second consecutive week of decline.

Canada and Mexico are integral partners in the oil supply chain for the United States, with Canada exporting approximately four million barrels of crude oil daily, predominantly to the U.S

Advertisements

Meanwhile, Mexico exports around 500,000 barrels daily, primarily purchased by Valero Energy Corp. to supply its Gulf Coast refineriesThese two countries collectively represent the largest sources of crude for the U.S., a fact that only amplifies the stakes involved in these tariff negotiations.

The Midwest region, which accounts for 23% of the nation's refining capacity, is heavily reliant on Canadian crude oilThe newly imposed tariffs could result in significant disruptions in oil supply for these refineriesCompounding the issue is the recent redirection of pipelines that traditionally carried oil from the Gulf to the Midwest, therefore inhibiting refineries in that region from accessing alternative crude varieties.

Financial analysts from Goldman Sachs, Samantha Dart and Daan Struyven, have warned that the tariffs on Canadian oil may face backlash in the Midwest, regardless of whether they are temporary adjustmentsIn a bid to alleviate upward pressure on gasoline and home heating oil prices, analysts noted that the White House opted for a lower tariff of 10% on Canadian energy importsThis tactical decision showcases the administration's awareness of the potential economic repercussions involving everyday consumers.

Concern within the U.S. refining sector has been palpable, as fuel producers expressed alarm over the adverse effects of tariff policyA warning from a major fuel manufacturer highlighted the potential erosion of refining margins and disturbances in the oil marketWith these tariffs in place, Valero's executives suggested that U.S. refiners may be compelled to reduce their refining rates, while Phillips 66 has projected a dramatic decline in the prices of Canadian crude.

Chet Thompson, the President of the American Fuels and Petrochemical Manufacturers, expressed a desire for swift negotiations to find a resolution with North American trade partnersHe emphasized the urgency of removing crude oil, refined products, and petrochemical goods from tariff lists before consumers bear the brunt of these financial impacts.

The actual implementation details of the tariff policy will significantly determine its influence on market dynamics

Advertisements

If producers are permitted to export oil from the Gulf region to non-U.S. buyers without incurring tariffs, the price effects on Canadian crude could be mitigatedFurthermore, the repercussions of the tariffs on oil transported via the U.S. to facilities in Ontario and Montreal remain uncertain at this point.

Interestingly, some analysts note that Canadian producers might find a silver lining in the depreciation of the Canadian dollarFurthermore, the annual maintenance season in the oil sands regions — typically commencing around April — may lead to reduced crude production, further mitigating the impact of the tariffs. “I would even argue that most stocks have already discounted the 10% tariff,” one analyst remarked amidst these discussions.

Prices for Western Canadian Select crude have shifted in response to the impending tax implications, with trading reported at a staggering $15.50 below WTI, marking the highest discount since July 30. Eric Nuttall, a partner and senior portfolio manager at Ninepoint Partners, anticipates that the 10% tariff could exacerbate this oil price differential, potentially widening it to $16-$17 per barrel.

The Mexican oil industry, too, finds itself potentially caught in the crossfireShould U.S. refiners shift their purchases towards alternative suppliers, Petróleos Mexicanos (Pemex) may need to increase its exports to Europe and Asia, adding strain to its profit marginsFurthermore, as the largest buyer of diesel and gasoline in the United States, Mexico is likely to feel the effects of rising U.S. fuel costsThis reality may push Mexico to seek additional imports from European and Asian markets.

As would be expected, the economic implications of a 10% tariff on oil imports are poised to ripple across various sectorsAnalysts predict that such a policy could lead to swift increases in diesel prices — a crucial component of the U.S. economy's backboneThis scenario raises questions regarding the Federal Reserve's capacity to lower interest rates in the near future

Advertisements

Advertisements

Advertisements