Canada's retaliatory tariffs on US imports such as cosmetics, motorcycles and rubber tyres are also likely to affect Canadian demand for US finished lubricant and naphthenic base oils.
Canada has imposed 25pc tariffs on $30bn worth of US imports, to be followed by another $125bn of imports in three weeks, in response to the US slapping a 10pc tax on energy imports from Canada and a 25pc tariff on non-energy imports. The US tariffs took effect at 12:01am ET (05:01 GMT) on 4 March.
The first round of Canadian tariffs will affect cosmetics and motorcycle imports from the US. It will likely have a knock-on effect on the process oils market as well as finished lubricant demand, as these products are key to cosmetics production and the performance and maintenance of motorcycles.
The Canadian tariffs extend to rubber tyres for motorcycles, passenger cars, and heavy duty and agricultural vehicles, which could weigh on demand for naphthenic base oils as they are used to manufacture rubber tyres.
The second wave of Canadian tariffs is expected to cover passenger cars from the US, further weakening finished lubricant demand.
Canada is a net importer of base oils and lubricants from the US, but is also one of the biggest exporters of those products into the US. Two of the largest Canadian base oil and lubricant plants are in the eastern province of Quebec and frequently target the US northeast and midcontinent.
If base oil and lubricant trade flows between the US and Canada slow down, market participants expect more Canadian product to move into western Canada and surplus volumes to target Europe.
Canada is mostly dependent on the US for its base oils and, in turn, its finished lubricant production. It has an estimated nameplate base oil production capacity of 1mn t/yr, compared with 10.8mn t/yr in the US. Canada has not placed direct tariffs on US base oils yet, and it is unclear whether it will extend them to include all energy commodities.
The US is a net exporter of Group II base oils, with exports mostly targeting Mexico, Canada and Europe. If tariffs on US base oils are imposed, the US would have to target more competitively-priced regions such as India, the Mideast Gulf and west Africa. The US could also be forced to increase exports to South America, which would weigh on US export spot prices.
The Mexican government has said it will announce retaliatory tariffs on 9 March. Base oils markets are unlikely to be affected in the short term as Mexico depends on the US for 90pc of its imports and has no domestic base oil production. Applications for new import permits to Mexico take 1-2 months to obtain, which would support US imports in the meantime.
Furthermore, bulk availability out of Asia and Europe is limited amid a heavy round of refinery maintenance in the first half of 2025.