President-elect Donald Trump's threat to impose tariffs on all Canadian imports would increase costs for producing US midcontinent road fuels, which are largely refined from Western Canadian Select (WCS) crude.
Trump said in November that he plans to impose a 25pc tariff on all imports from Mexico and Canada after he takes office on 20 January.
Canadian crude is the top feedstock for Midwest refiners, accounting for 66pc of the region's crude runs in September, according to US Energy Information Administration (EIA) data. Parts of the Midwest — as well as California and the northeast US — lack sufficient pipeline capacity to process domestic crude or to receive refined products from elsewhere in the country, according to the American Fuel and Petrochemical Manufacturers (AFPM), which represents many US refiners. So AFPM wants Trump to exclude crude and refined products from his proposed tariffs.
Most refiners in the US midcontinent depend on heavy sour crudes, with over 20 marketers and refiners importing crude from Canada in September, including BP's 435,000 b/d Whiting, Indiana, refinery; Cenovus' 151,000 b/d Toledo refinery in Ohio;Marathon Petroleum's 140,000 b/d Detroit, Michigan, refinery; and Phillips 66's 356,000 b/d Wood River refinery in Roxana, Illinois.Generally, heavier sour crudes are less expensive than lighter, sweeter crudes like WTI.
The US in September imported 4mn b/d of crude from Canada, accounting for 62pc of total US crude imports and a record high for the month, according to EIA data. The US midcontinent imported 2.6mn b/d of Canadian crude in the month, also a record high for September. In 2023, the region imported 2.7mn b/d of Canadian crude, the highest annual imports recorded for the region, according to the EIA.
Canada could move more of its crude through its 590,000 b/d Trans Mountain Expansion (TMX) pipeline to the Pacific coast, where it would head to international markets. US importers could also take more from countries like Saudi Arabia and Venezuela, which produce the heavy, sour crudes favored by refiners in the upper US midcontinent. Each supplied more than 200,000 b/d to the US in September, the largest exporters after Canada and Mexico, according to the EIA.
Pipeline movements from the US Gulf coast to the US midcontinent would likely increase if the upper US midcontinent refiners try to replace Canadian heavy sour crude. The region received 23.5mn b/d of crude from the Gulf coast, as the southern US midcontinent processes WTI. But the region would probably face higher landed costs for crude originating from overseas.
Refineries would have to be more disciplined with the increased feedstock costs that the threatened tariffs would impose, according to one market participant. The region would still have to rely on Canadian crude because US Gulf coast crude barrels would still cost more, and midcontinent refiners would have difficulty finding alternative sources. WCS Hardisty crude prices have averaged a discount of $17.08/bl to WTI Houston so far in the fourth quarter.
For road fuel prices during the fourth quarter to date, Chicago gasoline prices averaged a 1.33¢/USG discount to the US Gulf coast and Chicago ultra low sulphur diesel averaged a 1.34¢/USG discount. But regional spreads between Chicago and the US Gulf coast could continue to narrow if midcontinent refiners reduce operating rates.
