The oil market has been in the spotlight over the past few days due to the US President Donald Trump’s tariff narrative.
Over the weekend, Trump had announced that a 25% import tariff on goods from Canada and Mexico and a 10% import tariff on goods from China would go into effect on Tuesday.
However, Trump suspended the tariffs against Canada and Mexico for a month after both countries agreed to take action to reduce drug trafficking across the US border.
A reduced tariff rate of 10% was to apply to energy imports from Canada.
“This is probably due to the fact that Canada is by far the US’s most important oil supplier,” Carsten Fritsch, commodity analyst at Commerzbank AG, said.
Last year, the US sourced more than 4 million barrels of its daily crude oil imports from Canada, according to data from the US Energy Information Administration.
Source: Commerzbank Research
“This corresponded to more than 60% of total US crude oil imports. Mexico accounted for around 470 thousand barrels per day or 7% of daily US crude oil imports,” Fritsch said.
Finding other suppliers difficult
According to experts, finding other sources of crude oil imports other than Canada and Mexico would have been very difficult for US refineries.
“The biggest hurdle here is the US Midwest refining system which relies mainly on Canadian crude and also lacks sufficient access to US Gulf Coast for seaborne barrels as replacement,” Vortexa’s senior oil market analyst Rohit Rathod had told Invezz.
Rathod said:
This will lead to higher gasoline prices in these markets and poor refinery margins for refiners that could lead to potential closures as well. It will be difficult to replace Canadian crude in these markets.
Oil from Venezuela could be considered a substitute due to its similar quality and geographical proximity.
The US’s decision to cease oil purchases from Venezuela was announced by Trump soon after he assumed office.
Last year, US imports from Venezuela averaged 220,000 barrels per day, which will therefore also have to be replaced, according to Commerzbank.
Brazil and Guyana are also considered possible suppliers of the heavy sulphur-rich oil required by US refineries.
The US received deliveries of 220,000 and 180,000 barrels per day from these two countries respectively during the first eleven months of last year.
“However, it is doubtful that imports from these countries can be increased significantly within a short period of time. At best, this could have compensated for imports from Mexico, which would have been subject to a 25% tariff.” Fritsch said.
Refineries reduce purchases
To avoid tariffs, US refineries may have decreased their crude oil purchases from Canada and Mexico, according to Commerzbank.
This could have resulted in a US oil shortage and less crude oil processing.
Additionally, US refineries would have passed on the increased costs of imported crude oil from Canada and Mexico to US consumers through higher gasoline prices.
The US could have also reduced its oil product exports. In the first eleven months of last year, the US exported an average of just under 3.2 million barrels of refined petroleum products per day.
Nearly 1.3 million barrels of diesel and almost 800 thousand barrels of gasoline were accounted for per day.
Source: Commerzbank Research
“The US has also become an important diesel supplier for Europe after diesel shipments from Russia ceased due to the EU import ban in early 2023. For this reason, import tariffs would lead to a shortage of diesel supply in Europe,” Fritsch said.
Tariffs against Canada and Mexico may be reinstated if a permanent solution is not found within 30 days.
“Until then, the motto ‘’postponed but not cancelled‘’ applies.”
Sanctions against Iran
President Trump’s directive to increase economic pressure on Iran was reflected in the bullish price action for crude during the latter part of Tuesday’s trading session.
“This move shouldn’t come as too much of a surprise given that President Trump was hawkish towards Iran during his first term and reimposed oil sanctions against Iran back then,” Warren Patterson, head of commodities strategy at ING Group, said in a note.
The sanctions imposed against Iran were never officially rescinded by the Biden administration.
However, the enforcement of these sanctions was relaxed, especially in the aftermath of the Russian invasion of Ukraine.
“Therefore, stricter enforcement could see as much as 1m b/d of supply at risk,” Patterson said.
However, reduced flows from Iran will not help in lowering oil prices, something that President Trump is very keen to achieve.
To mitigate the potential impact of Iranian oil losses on the global market, Trump would need to persuade OPEC to increase oil output, a measure he has publicly advocated for.
However, securing cooperation from key OPEC members like Saudi Arabia to boost production at current price levels could be challenging.
Several factors contribute to this difficulty. Saudi Arabia and other OPEC members may be hesitant to increase production if they believe that current oil prices are sufficient to meet their revenue needs.
Additionally, they might be wary of oversupplying the market, which could lead to a price drop and negatively impact their oil revenues.
In any case, OPEC+ is scheduled to increase production slightly from April when they unwind some of their voluntary production cuts of 2.2 million barrels per day.
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