Impending US tariffs on Canadian and Mexican imports could mean significant changes for millions of barrels of daily cross-border crude flows between the countries.
President Donald Trump on Thursday repeated his threat to impose 25pc tariffs on all trade with Canada and Mexico effective 1 February. Trump said the US "... may or may not" exclude oil" from the tariffs, depending on crude price levels. That decision could come later today.
Canadian officials have also weighed targeted retaliatory tariffs on the US and even withholding crude outright.
A long history of crude and refined products flows between the three countries under well-established trade agreements has tightly bound together operations on all sides. This means adaptations on short notice could be difficult, leading to higher road fuel prices for some US drivers and businesses. February volumes have already been purchased, but not yet moved across the border, so importers could still be on the hook for the added tax if tariffs are imposed on 1 February.
Since Trump's initial pronouncement weeks ago, market participants on both sides of the border have been trying to determine potential impacts on movements and price. The Canadian trade cycle for March starts 3 February, with mixed opinions leading to volatility in the financial market for heavy Western Canadian Select (WCS) in Hardisty, Alberta. Thursday trading put March WCS at a $14.25-13.75/bl discount to the CMA Nymex WTI, after averaging a $12.25/bl discount to the benchmark during the February trade cycle.
About 80pc of Canada's 5mn b/d of crude production flows downstream to US refiners, with US imports of Canadian crude reaching a record high of 4.42mn b/d in the week ending 3 January, according to Energy Information Administration (EIA) data. The single largest conduit is Enbridge's 3mn b/d Mainline system, which reaches into Chicago to serve midcontinent refiners and hands off crude to other lines that go to the US Gulf coast for refining or export. South Bow's 622,000 b/d Keystone pipeline also serves US markets via a more westerly route.
Two-way dependence
Alberta oil sands producers are highly dependent on those US customers, but the dependence is two-way, as 4.25mn b/d of US midcontinent refining capacity relies on heavy sour Canadian crudes for up to 70pc of their supplies.
In theory, US midcontinent refiners could run lighter, US-produced grades. But there are relatively few pipelines serving the midcontinent with such grades and those grades would be much less profitable than using a pre-tariff WCS barrel.
Canadian heavy crudes already have become less price advantaged relative to lighter grades in the wake of the startup of 590,000 b/d Trans Mountain Expansion (TMX) pipeline in May 2024 sending crude to Canada's west coast. The Argus WCS Cushing discount to the CMA Nymex averaged about $4.90/bl for February delivery, down from about $8/bl during the February 2024 trade month. Some market participants have already seen an uptick in demand for Canadian crude amid the uncertain impact of US import tariffs.
US Gulf coast flows
Canadian crude is also suited for many refineries on the US Gulf coast, but these refiners are less reliant on Canadian imports because of the region's access to alternative Latin American and Middle Eastern waterborne heavy sour supplies. Currently, Canadian crude makes up just over a quarter of crude imports to the US Gulf coast, with domestic US crude production encompassing a large majority of the refinery feedstock in the region.
Canadian crude values at the Texas Gulf coast have also risen over the last year. The Argus WCS Houston discount to the CMA Nymex is roughly $4/bl for February delivery this year, tightening from over $7/bl a year earlier. Higher values have likely led some refineries to shift to lighter, sweeter crudes already as the price advantage for heavies decreased. But recent refinery operational issues and the pending closure of LyondellBassell's 268,000 b/d Houston refinery is weighing on Houston-area prices lately.
West coast also has options
On the US west coast, TMX's startup increased imports of Canadian grades in the region. Since May, west coast refiners have imported about 170,000 b/d of crude from Vancouver's Westridge Marine terminal, up from just under 40,000 b/d a year earlier according to data analytics firm Vortexa.
But tariffs would make TMX cargoes less affordable from Vancouver and decrease its competitiveness relative to heavy sour alternatives. This could allow demand for Latin American medium and heavy sour crudes such as Napo and Oriente to recover after being displaced by cheaper and more convenient TMX supplies.
Argus' fob Vancouver Cold Lake assessment is averaging a roughly $7.60/bl discount to Ice Brent during the January calendar month so far, narrower than the $8.70-$8.80/bl discounts to the international benchmark for November and December.
Notwithstanding potential Canadian retaliatory tariffs, market participants also lack clarity on how Canadian imports of US diluent will be handled under potential US import tariffs once blended with Albertan bitumen and re-exported to US refiners. Although a majority of the diluent used for blending in Alberta is domestically sourced, considerable condensate demand is satisfied via Pembina's 110,000 b/d Cochin and Enbridge's 180,000 b/d Southern Lights pipelines, both of which transport condensate from Illinois to the Edmonton region.
