Weight of Freight: Trump Card – How would US tariffs on Canada and Mexico impact crude and freight markets?

Alex Younevitch
Hello and welcome to the weight of freight where we explore the intricate yet powerful connections between the commodities and shipping markets. And this episode will also feature on the crude report podcast series. So Trump 2.0 is now upon us. And oh boy, is it shaping up to be an exciting ride for the global commodities trade. And for today we will focus on what Trump's new term in office may mean specifically for the crude market and tanker freight.
And my name is Alex Unovich. I'm the global head of freight at Augs Media and I'm joined by a bunch of my smart colleagues here today, which is Nick Watt, editorial manager for freight James Goode, VP for crude in Emir Bruce Fulan, VP for crude in the US, and Jeff Krawowitz, who's the VP for crude. Looking after Canada. And we're recording this podcast on January 14th. So James, thank all of you for being here. And the Trump topic that we're tackling here is huge. So.
We're gonna narrow it down, and in this episode, focus on the tariffs, which Trump promised to enact from his first day in office on January 20. So let's start with Canada here. What would a 25% tariff, if it were to happen, mean for Canadian exporters, the US refiners? Jeff.

Jeff Kralowetz
Alex, I think it would mean two things, one pretty dramatic.
Trade flow changes specifically around the the West Coast of the US and secondly, big impacts on gasoline, diesel, jet fuel prices in the mid continent of the US. And just to unpack that a little bit on the West Coast, we've got over 150,000 barrels a day of new crude leaving Vancouver by ship going to California coast.
That would likely all be diverted to Asia if the price to the Californians went up by 25%. So that would have some significant issues for for freight and then looking at PAD 2, which is the midcontinent, the section of the US around Chicago.
A couple things.
The Canadians might well try to discount their sales to pad 2A little bit to take the sting out of the tariff, but in almost any scenario you would see.
The Pad 2 refiners cutting their runs and.
The price of gasoline and distillate rising.
Pretty dramatically.

Alex Younevitch
OK. And if we're talking here about the TMX and Vancouver Rack sports and them being diverted to Asia as you Jeff said might have a considerable impact on the trade flow, but therefore also the transportation costs and.
Shipping comes into the play here, so Nick right now we have the situation where it's about half and half. So half of what Team X produces and goes into the sport market goes to the West Coast or to Powell.
And about half goes to Asia. Do you agree with Jeff? Are we likely to see that there's going to be just full on flow to Asia and what that would mean for just the freight rates around the region?

Nick Watt
I do. Yeah. I think it would. It would likely mean.
Most of those most, if not all of those cargos that had been, you know that are right now going to the US West Coast would would be going to Asia, primarily China possibly a little bit to India and a few other countries.
And right now it's about an average of a little over 20 afromaxes per month.
That load crude in Vancouver.
Afromax. That's the largest type of vessel that that export terminal there can can accommodate and what you would see is more of these long haul journeys across the Pacific.
And instead of these shorter voyages to the US West Coast and what that does to the freight market is it stretches the fleet, it puts a little bit of upward pressure on rates. Now mind you, right now, freight rates are are pretty low. They've been flirting with multi year lows. They got a little bit of a boost in the last few days.
Following the sanctions announcement, but in general, freight rates are pretty low, so they have quite a bit of room to rise.
In general, I I would see tariffs here as a as a as putting a bit of upward pressure on on tanker rates.

Alex Younevitch
Makes sense. OK. And do you think that what's going on around the West Coast would also spill? The effect would also spill into the US Gulf Coast in terms of afromax freight?

Nick Watt
It might a little bit, I mean separate basins, but the the the tanker market is is a global one. So if you have a bit of tightness in in one base and then that then that has that starts to influence the the supply in in other basins as as ships.
Shift from from one region to another.

Alex Younevitch
And Speaking of Gulf of Mexico as it is cold these days, the that's another question that we have here. The tariffs are also promised for Mexico in, in, in about this with the same number of 25%. And obviously the dynamics here are a little different than it is for for Canada. So Bruce, can you maybe shed some light on what?
The impact may be from tariffs on Mexico, where in terms of the crude flows, in terms of maybe prices for.
Us refiners and how much is gonna impact them and where maybe the flows are gonna shift if the tariffs were to happen.

Bruce Fulin
Sure. It's actually it's kind of fun being down here in Texas because quite honestly, we're kind of the epicentre of this. So starting with the the Gulf of Mexico system, of course, we have a lot of refinance capacity down here in Texas, Louisiana, but we're gonna get 2, get two ways. One crude does make its way from Canada down to the US Gulf Coast, but also we pull a lot of crude in from Mexico. So the first thing you're going to see is that displacement of Mexican crude coming off. It could be somewhere between 3:00 to 500.
Was a day off offline. It's gone. The nice thing that's different, though worse is the Gulf of Mexico versus PAD 2 that's in the centre of the United States as well. We have pipeline connectivity and water board. So you could bring crews in from the other areas around the world pretty quickly. So Mexican crew can just get pushed to another part of the world. That's fine. Let it go to Asia. Let it go wherever it may be. We'll probably take Cruise in from the the Middle East. We've historically have taken cruise like that in the past. So we could take some showers that come in that area to.
Offset some of the price. We do produce some sell recruiting us, but the heavy crude is what's going to be kind of missed the most we have on and off depending on sanctions could get it from Venezuela maybe yes, maybe no, we could get it from places like Brazil and Colombia. So there are options for the the Gulf of Mexico just to pull heavy crude in from other locations. So you're gonna just see a little bit of dynamic crude full change if this impact does come through.
You know very quickly the other thing is Mexico. Well, it's over here on the.
Pacific's or the Atlantic side of the ocean, where we're we're sitting at that particular crude. So that crude is going to week its way most likely into the Asian or European market. It could just go that way, could go E it's a little bit different dynamic than when you're looking at the Pacific Ocean on the West Coast where Jeff was alluding to, we're gonna be short crewed there, it's a waterborne market. So that's gonna have to get back filled most likely with South American cruise like oriented.

Alex Younevitch
Mm hmm.

Bruce Fulin
Napo crude, out of Ecuador, for example. We'll probably come back into those next.
And that's crude. It was on the fringe of being exported of into the Asian market. That's probably gonna pull its way back into the California market. So a lot of flows that are happening and we're definitely gonna see a little bit pressure on the sweet and sour spread for sure in the Gulf of Mexico. So if we're gonna be a little tight on the sour side of it, well, it's probably gonna, you know, influence that light light, heavy Sprint, sweet sour spread.

Alex Younevitch
Makes sense. And Nick coming back to you here quite a few changes. Just listening to what Bruce Bruce had to say in terms of where the where the crude flows are going to go.
Especially if we're talking about long haul VLCC voyages, say from the Middle East bringing rocket crews to IBS Gulf Coast, US West Coast and of course the shift in where different American producers ascend their stop. What do you think how that is going to impact the freight rates which?

Nick Watt
Mm hmm.

Alex Younevitch
Types of vessels are gonna be more expensive. And how is gonna affect the, you know, the cost of moving crude overall for Americas?

Nick Watt
Sure. Same dynamic here in that if you have tariffs, the the market gets less efficient and what you're doing is you're getting rid of short haul voyages and replacing them with with long haul voyages. So if you have more Mexican crude exports to to Europe and to Asia, then those are relative at least to shipments to the US Gulf Coast.
Are those? Those would be very long haul voyages that keeps the tanker occupied for longer.
And and starts to to tighten the market a little bit. There's also the issue of potential retaliatory.

Alex Younevitch
E.

Nick Watt
Tariffs on on US shipments to Mexico. So Mexico is is the largest buyer of of of US gasoline and diesel.
That would also. So that's this is all hypothetical, everything we're talking about right now is is hypothetical. But if that if that did happen, then that would be a pretty significant disruption to the to the clean tanker market and add tonne miles into that market as well.
Tankers. It's a global market. So all of this puts a little bit of upward pressure on rates.

Alex Younevitch
And since we're talking global market Europe, also a known place in the world, how is that?
How Europe in particular may be affected by this? James, are we gonna see some changes and flows here or would the the tariffs specifically on Mexico and Canada and with all the changes and flows that guys talk about not have much of the impact of what Europe consumes, could you shed no light on that?

James Gooder
Questions. I mean, Europe has come to rely quite heavily on crude from the United States. It's not sending much crude to the United States at the moment.
But any change in the flows out of the Americas could be to the benefit of Europe. We've learnt to rely on America's crude more and more since.
Well, since the lifting of the export ban, of course, back in 20 at the end of 2015, but much more and more since.
The Ukraine Russia conflict began, of course, with Russian crude, the mainstay of Europe being diverted due to embargoes to the Asian market. There was a huge gap in Europe for crude, particularly of medium sour type, and just looking at the latest flows into Europe from a just from the US regarding regardless of the rest of the Americas, there's more than two million barrels a day of US crude.
Being delivered into Europe this month and that is close to a record, but not the record. It was even higher than that at certain times last year, so.
There. I mean, we're speaking about Trump and tariffs. Trump did make a comment back in December, which, you know, like every month seems like a lifetime ago. But back in December, he said something like, you know, Europe needs to buy more U.S. oil and gas or face big time tariffs. I don't know if there are exact words, but it was words to that effect. Now, of course, you know, we're we're recording this on the 14th. There have been some noises.
From the incoming administration that tariffs maybe introduced gradually and to avoid any kind of big disruptions.
And as Nick said, everything we're discussing here is.
Hypothetical, but you know, Europe is not united at the moment. Frankly speaking, we have governments collapsing, particularly in.
France and Germany, the kind of mainstays of the European Union.
We have Europe, the UK of course, is out of the European Union now.
And, you know, aside from the tariff issue, you know, if if pressure comes from an incoming Trump administration to change, let's say, our relationship with Russia, there may be some parts of Europe that are more inclined to do that more quickly than others. And so an already rather fractured block.
May find itself.
Under pressure from from both sides, if you like so we'll see. There are some that expects. We'll see more Russian oil being refined in Europe by the end of 2025.
It's highly speculative at the moment it it can't happen.

Alex Younevitch
Mm hmm.

James Gooder
But the appetite is here in Europe for medium sour crude, and so whether, you know, embargoes are lifted and sanctions relaxed in the short term, it doesn't look like it. But there is a ready market for that crude in, in certainly parts of Europe. But given that the flows have changed so radically, I think we can expect more crude from certainly from Latin America and from the US to continue to to satisfy European demand.

Alex Younevitch
Makes sense. OK. And in terms of winners and losers here, if we sum up from what we talk here, if those tariffs, I've even if there is in or they just straight straight up 25% and if they're gonna happen at all of course. And they do come into play, who do you think guys would be the main winners here in terms of for instance gaining market share whether it would be in the US whether it would be in Europe or?
A lot of time and who and who might be suffering more than others, they're starting with you, Jeff.

Jeff Kralowetz
I can't tell you a winner. I can tell you two big losers. One is the American consumer who could see $6 plus gasoline prices, particularly Midcontinent, California. But secondly, the Canadian producer who will be leaned on by the refiners to lower their prices a bit and.
You have to remember that the Canadian barrels of crude oil that are produced in Western Canada and go to Quebec, in eastern Canada, they travel through the United States and it's anybody's guess.
About whether that throughput is going to work under this new new world.

Alex Younevitch
Yeah. And you guys agree, any winners at all or it's it's just gonna hit everyone the same?

Nick Watt
Well slight 10.

Bruce Fulin
Oh, some people are definitely gonna gonna win. I mean, there's a possibility when you displace heavy crude from Mexico and Canada, someone's gonna backfill that. Right? So where that's probably gonna come straight out of the Middle East. So you know, companies whether somoa Iraq or the Saudis with the ramco, they're gonna seize this opportunity. Come it quick, you know? And they know because, you know, Aramco, for example, has a refinery here in the US Gulf Coast. They're gonna come straight in for that. But on the same flip side, Pemex, which is.
Refinery as a refinery here too, their crew's gonna be cut. Someone's gonna have to figure out how to make that relationship network. So you better believe it's gonna come in. Most likely from the Middle East. Maybe a little bit more South American can take it away from Europe. So, hey, that's fine. We'll take that crude over here as well. So there is some opportunity for some people to come in, try to take longer term market contracts or take firm positions in it. If these tariffs stay, those are the people that are going to take advantage.
They're gonna move quick.

James Gooder
I think I think as well that one thing we can be sure is that tariffs bigot more tariffs right? There may be retaliatory measures from.
From China, I mean we we in the last Trump administration, we saw a kind of trade war with China. Certainly European lawmakers would be quick to to take advantage of that if they could, you know, get cheap goods instead of them being sent to the United States. And as Nick was saying before any of any kind of measure like this just increases inefficiency in the system which may benefit.
Some if there are higher freight rates and if there are higher prices for certain kinds of crude. But as Jeff was saying, consumers are usually the the bear, the brunt of these kind of these kind of measures.

Alex Younevitch
One's paying the price, yeah.

Nick Watt
And I'd imagine ship owners would be could could benefit a little bit.

Bruce Fulin
James, should we be going long? Freight is the question. I mean obviously you're you're bullish on the freight side of it. What do you think, Nick?

James Gooder
I work for August, so I'm I'm not allowed to take any position.

Alex Younevitch
But yeah.
That's a very good get, very good answer.

Bruce Fulin
But a long haul is the keyword here.

Nick Watt
I from from. I think like the shipowner perspective, short, medium term and might be beneficial as you see see these longer haul routes. They like the long haul cargoes. Now if you get into a wider trade trade, you know trade war and you start to see global trade start to slow, that starts to remove some cargos and could in the longer term put some downward pressure on the market so.
You might have a little bit of a sugar high from a shipping perspective early and that that that could could wear off depending how how this develops.

Alex Younevitch
Well, there is also when it comes to shipping, there's also the question of how much fleet is gonna go go into it. And here we look both at what's gonna happen with the sanction fleet and what is gonna do with the sanctions are further tightened as they are now or if they're released by Trump and the administration further. And the new deliveries. But that is a whole topic in itself, which we're probably going to address in the other podcast for this one we're running.

Nick Watt
Mm hmm.
Absolutely.

Alex Younevitch
We're running out of time already, so I just want to thank everyone for joining and sharing your amazing expertise on this and educated, you know, opinions on the where these things might go and.
To everyone listening, if you are a subscriber of either August crude August tanker freight, you will be able to download a limited edition file with a lovely map from the link in the podcast and thank you very much for listening and we'll see you in the next one.
Lovely.