President Donald Trump's threats to impose tariffs on imports from Mexico dealt the latest blow to US heavy crude supply options already narrowing under his administration this year.
Actions against Mexico would join sanctions against Venezuela and Iran and infrastructure constraints from Canada in trimming a key competitive advantage for the most complex US refiners. Trade groups warned the measure could increase US retail fuel prices.
"We thus urge the president not to pursue energy tariffs against one of our most important trading partners," American Fuel and Petrochemical Manufacturers chief executive Chet Thompson said.
Trump late yesterday said he would impose escalating tariffs beginning at 5pc on "all goods" from Mexico starting 10 June unless the country did more to halt illegal crossings of the US-Mexico border. Tariffs would increase by 5pc each month until a final 25pc in October.
Imports of Mexican heavy crude surged in March, according to the latest Energy Information Administration data. US buyers scrambled to replace heavy, sour supplies from Venezuela, which had been blocked by US sanctions imposed on 28 January on national oil firm PdV. Mexico was the second highest source of 20°API or lower crude after Canada, a role the country's heavy production has not played for US refiners since 2011. Venezuelan production, the single largest US source of heavy crude from 2003 to 2017, shrank to fifth in March out of seven suppliers.
Mexican heavy was 27pc of all heavy crude imported for the month. Colombian and Brazilian heavy production also showed marked increases in March compared to the same month of 2018.
Refiners privately said 5pc would not be an immediate, severe impediment. But the potential escalation was a concern. Shell, the largest regular US importer of Mexican heavy crude and operator of a 340,000 b/d refinery in Deer Park, Texas, in a joint venture with Mexico's national oil company, Pemex, could not be immediately reached for comment. Chevron, the second-largest routine importer of Mexican heavy crude, cautioned against US trade measures that could invite a response.
"Chevron supports free and fair trade, and believes the imposition of new tariffs should be balanced against the potential for retaliatory actions that impair the development of new markets," the oil major said.
Mexico's slow liberalization of its oil market has made it an attractive investment for oil majors and US independent refiners. Marathon Petroleum has expanded its Arco brand across western Mexico, integrating a wholesale business there with its western US refineries. Valero invested in port and inland infrastructure in central and eastern Mexico, while BP, Chevron, Shell and Total have all expanded retail businesses over the same area.
But it would be difficult for Mexico to spurn such businesses in retaliation. Mexico imported 71pc of its gasoline demand for the first two weeks of May from the US. US diesel satisfied 77pc of demand over the same period.
Mexico has worked to increase its destinations for crude. US was still the main destination of Mexico's crude exports in April, taking 58pc, or 594,000 b/d. Asia received another 296,000 b/d, or 29pc, and Europe 133,000 b/d, or 13pc.
"Pemex has been sending now an increasing percentage of its production to the Netherlands and some part of Asia," Mercury Energy Consultants analyst Arturo Carranza said. "This has been part of a long-term strategy to depend less on US purchases."
US refiners, meanwhile, must continue to hunt for heavy feedstocks as the industry exits an intense maintenance period in the first half of this year. July prices for Western Canadian Select (WCS) — the new king of US coking units — have crept toward discounts supporting costlier railed shipments of the crude.
