US independent refiners, already facing weaker margins, falling demand and regulatory uncertainty in their burgeoning renewables businesses, are braced for another imminent headwind from US tariffs.
The US may impose a 10pc tariff on energy from Canada and a 25pc tariff on all imports from Mexico starting on 4 March. Refiners are scrambling to find alternative supplies, including switching to lighter crude slates, but this will come at a cost. Although short-term margins are due to improve with refinery closures and maintenance, a sustained tariff war could add another long-term problem.
The potential tariffs come as US independent refiners including Marathon Petroleum, Valero and Phillips 66 are coming out of a rough fourth-quarter earnings season, with lower margins cutting into profits year on year.
The tariffs have already caused problems in North American oil markets as trading desks struggle to understand how they would work in practice and some buyers hold off from committing to taking March cargoes until details are clarified. But one thing is becoming clear — tariffs will lead to higher feedstock costs and will cause some refiners to reduce runs, cutting further into profits.
US independent refiner PBF Energy chief executive Matthew Lucey says tariffs on Canadian crude would cause US midcontinent refineries to cut throughputs, even if they find alternative crudes. Marathon Petroleum, the largest US refiner by volume, says it could pivot some of its midcontinent refineries to run domestic crude slates such as Bakken from North Dakota and Montana, crude from the Rockies, or crude from the Utica and Marcellus shale regions in the northeast US.
Tariffs would lead to price increases, but most of it "will ultimately be borne by the producer" and to a lesser extent the consumer, Marathon chief executive Maryann Mannen predicts. Smaller refiner HF Sinclair also says it could switch to alternative, lighter crudes at its refineries if tariffs are implemented.
Several refiners agree with Marathon that producers would bear the brunt of the tariff costs, but the impact on oil prices will have repercussions throughout the industry. US bank TD Cowen expects US refiners that run Canadian crude on the margin to switch to light sweet crude, increasing WTI and Brent prices. Meanwhile, inland refiners that run Canadian crude as a core part of their slate are likely to continue to do so, the bank says. Phillips 66's executive vice-president of commercial Brian Mandell agrees with that assessment, saying that Western Canadian crude will continue to flow to US refiners, but at a greater discount.
Sour taste
Meanwhile, US Gulf coast refiners will be likely to replace Mexican and Canadian heavy crude with crude from other heavy sour producers such as Iraq, TD Cowen says. The switching will be likely to tighten medium and heavy sour differentials already tight from Opec+ curtailments and US sanctions against Russia. If it becomes too expensive to switch to heavy sour crudes, refiners could run less-efficient crude slates, reducing product supplied.
Despite the headwinds, US refiners have expressed optimism that margins will improve in 2025 as a result of a heavy spring maintenance season and expected capacity closures. Two large US refineries are shutting down this year — LyondellBasell's 264,000 b/d Houston, Texas, refinery is in the process of closing, and Phillips 66's 139,000 b/d Los Angeles refinery is planned to be shut by the end of the year. Marathon says it expects the US refining industry to remain structurally advantaged over the rest of the world in the long term "mainly due to the availability of low-cost energy". But US tariffs — and the increase in prices that is likely to follow — could challenge that notion.
