Trump’s Tariff Move Shakes US Oil Market, Forces Refiners to Seek New Suppliers

The US oil refining sector is set for a significant shake-up as President Donald Trump’s recent tariff imposition on Canadian and Mexican crude imports disrupts established supply chains. With import costs rising due to the levies, refiners are expected to turn to Latin America and the Middle East for alternative sources of heavy crude. The move has placed approximately 4.5 million barrels per day (bpd) of oil imports from Canada and Mexico under financial strain, triggering a broader shift in global energy flows.

Refiners Look Beyond North America

US refiners, particularly those dependent on heavier crude, are now considering new suppliers to mitigate rising costs. Traders anticipate that refineries will seek crude from Brazil and Guyana due to their geographic proximity. Additionally, oil from Iraq may emerge as an option, though the country’s limited supply of destination-free cargoes constrains its ability to export freely. The search for alternative sources underscores the broader ramifications of Trump’s tariffs, which impose a 10% levy on Canadian oil and a steeper 25% duty on Mexican barrels.

While Venezuela could have been a natural substitute due to its similar crude quality, Washington's restrictions on its oil exports remain a key hurdle. The changes could lead to a partial rerouting of energy supply chains, increasing transportation costs and extending delivery times. Analysts predict that Mexico’s excess crude could find buyers in Asia, while Canadian producers may offer discounts to maintain access to the US market. Some Canadian oil could also be redirected through the Pacific, though logistical constraints limit this option.

Impact on Prices and Refining Costs

The new tariffs add a direct financial burden on both producers and consumers. Analysts from JPMorgan Chase & Co. highlight that Canadian producers will likely be forced to reduce Western Canadian Select crude prices to offset the 10% tariff. Meanwhile, Mexico has the flexibility to redirect exports to Europe and Asia, with the US refining sector forced to adapt by securing crude from more distant sources, increasing transit times and costs.

For US refiners, especially those in the Midwest that rely on Canadian oil, feedstock expenses are set to rise. Goldman Sachs Group Inc. estimates that the tariffs will translate into an additional $3 to $4 per barrel in costs for Canadian producers and $2 to $3 per barrel for Midwestern consumers. These increased costs will eventually ripple through the market, influencing the price of refined petroleum products nationwide.

Gasoline Prices Surge Amid Supply Constraints

The immediate response to the tariffs was a spike in gasoline futures in New York, which surged by as much as 6.2%. This reflects expectations that refiners will either pass on the increased costs to consumers or reduce fuel production rates. The shift could create opportunities for Asian and European refiners, who may capitalize on stronger demand for gasoline and diesel in the US market.

Asian refiners, particularly in China, which have been grappling with shrinking profit margins due to US sanctions on Russian oil, could benefit from these market shifts. However, logistical bottlenecks could limit the extent of supply rerouting. The challenge of transporting Canadian crude to the Pacific, due to limited pipeline capacity, remains a critical issue. Similarly, geopolitical risks affecting Red Sea shipping could further disrupt oil movements.

Despite the disruptions, RBC Capital Markets strategists argue that a 10% tariff on Canadian oil may not be severe enough to significantly alter trade flows. “At 10%, pricing offsets are more manageable, and likely will not require a significant overhaul to physical flows,” noted Brian Leisen of RBC.

Oil Prices Slide Amid Demand Concerns and Trade War Fears

While the tariffs on Canadian and Mexican crude caused immediate shifts in refinery procurement strategies, broader market forces are also influencing oil prices. On Wednesday, oil prices fell by around 2% as US crude and gasoline stockpiles showed unexpected increases, signaling weaker demand.

Brent crude futures declined by $1.47, or 1.93%, to $74.73 per barrel, while West Texas Intermediate (WTI) dropped by $1.52, or 2.09%, to $71.18. According to the Energy Information Administration (EIA), rising crude inventories suggest refiners are facing subdued gasoline demand, leading to maintenance shutdowns. "Refiners just don’t have a call for crude right now," said John Kilduff of Again Capital, emphasizing the trend of refiners cutting operations due to slack demand.

China-US Trade Tensions Add to Market Volatility

The oil market is also being influenced by escalating trade tensions between the US and China. On Tuesday, China announced retaliatory tariffs on US imports of oil, liquefied natural gas, and coal, responding to American levies on Chinese exports. The move triggered a 3% drop in WTI crude prices, marking its lowest level since December 31.

The imposition of tariffs reduces demand for US energy exports, forcing American producers to find alternative markets. "China putting a tariff on US imports reduces the demand for those commodities, which need to be redirected into another market," noted Andrew Lipow, president of Lipow Oil Associates.

Iran Sanctions Threaten Further Supply Disruptions

Amid trade tensions, geopolitical factors continue to add uncertainty to the oil market. On Wednesday, Iranian President Masoud Pezeshkian called for unity among OPEC members to counter possible US sanctions. Trump has hinted at restoring his “maximum pressure” campaign on Iran, which he implemented during his first term.

If sanctions on Iran are reinstated, the resulting supply squeeze could push oil prices higher. Ahmad Assiri, a research strategist at Pepperstone brokerage, suggested that constrained supply from Iran could sustain upward pressure on prices, particularly if OPEC+ producers are slow to adjust output.

Iran’s oil exports generated $53 billion in 2023 and $54 billion in 2022, according to EIA estimates. Current output levels are at their highest since 2018, based on OPEC data. However, if Trump reintroduces sanctions, Iran’s ability to sustain these export levels could be significantly curtailed.

The Oil Market at a Crossroads

The global oil market is now navigating a precarious balance between conflicting forces. On one hand, the risk of an escalating US-China trade war threatens global oil demand growth. On the other, potential disruptions in Iranian oil exports could drive prices higher.

"The oil market is now caught between increasing fears that an escalating trade war will damage global oil demand growth on the one hand and possible sudden disruption of Iranian oil exports," noted Bjarne Schieldrop, chief commodities analyst at SEB.

As US refiners seek to adjust to the new tariffs on Canadian and Mexican crude, the long-term impact of Trump's policies remains uncertain. Whether alternative sources from Latin America and the Middle East can effectively replace North American supply will depend on pricing, logistics, and broader geopolitical shifts. In the meantime, consumers in the US and beyond are likely to feel the ripple effects through fluctuating fuel prices and market volatility.

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