US crude imports could be affected by Mexican tariffs

Jun 07 2019

US tariffs on Mexico - what are the implications for the oil and tanker market?

On 30th May, President Trump tweeted that he will impose 5% tariffs on all imports from Mexico unless they do more to reduce the inflow of Central American migrants into the US.

The tariffs are due to start on 10th June and will increase monthly by 5% until they reach 25% (by October).

While energy was not specifically mentioned, the US imports about 650,000 barrels per day of crude oil from Mexico, which could be affected by these tariffs, Poten & Partners said in a comment piece.

US crude oil imports from Mexico have decreased from an average of 1.4 mill barrels per day in the 2000s to the current levels, as Mexican crude oil production has declined from 3.8 mill barrels per day in 2005 to 2.1 mill in 2018.

Most of the US imports from Mexico are heavy crudes, as the country is using most of the declining volumes of lighter grades for its own refineries.

About 80% of the Mexican imports are Maya crude, a heavy grade (21-22 API) with a relatively high sulfur content (3.4%). Mexican crude has become more important to US refiners after Venezuelan crude oil imports fell, initially due to production problems but then stopped as a result of sanctions on PDVSA, the Venezuelan state oil company.

Valero and Shell are currently the largest importers of Mexican crude with about 125,000 barrels per day in recent months followed by Chevron and P66, Poten said..

In 2018, Mexico exported about 1.2 mill barrels per day of crude oil. The US imported slightly more than half and about a quarter was shipped to Asia, predominantly to India and South Korea. The remainder went to Europe, mainly Spain.

Exports to the US are short-haul and undertaken almost exclusively by Aframaxes, while long-haul exports to Asia are dominated by VLCCs. Exports to Europe are primarily shipped on Suezmaxes.

According to Bloomberg, Maya crude was trading at about $58 per barrel last week. At this price, a 5% tariff represents an increase of about $3 and a 25% tariff would increase the price by about $15, which will make Mexican crude oil uncompetitive in the US market, Poten said.

US refiners would need to look for alternative crude oil sources. Logical replacement crudes would be Western Canadian oil, which has similar properties to Mexican crude. However, pipeline capacity constraints have limited the availability of Canadian crudes, as Canada has had trouble in getting additional export pipelines built.

These constraints became so dire that the government of Alberta instituted a production cap in an effort to reduce the price discount of Western Canadian crude to other crudes. Canada could raise export volumes by using more rail shipments but the growth potential would be limited.

With Venezuelan grades off limits for US refiners, alternatives in the region are few and far between. Oriente crude from Ecuador could fill some of the requirements but is now rarely used in the US Gulf region.

As US refiners have already increased their intake of light sweet crudes and have limited capacity to further lighten their crude slate, it is likely that Middle Eastern grades will need to make up some of the shortfall if the Mexican tariffs are indeed implemented.

In turn, Mexico will need to look for other customers for their crude. Selling more to existing buyers might be the first choice, as they are already familiar with processing the crudes. This move would be positive for VLCCs for Asian volumes and for Suezmaxes for European buyers.

The other question is, what will be the reaction of Mexico to US tariffs?. Currently, there is no indication if and how Mexico will react. However, the US currently exports about 1.1 mill barrels per day of petroleum products to Mexico. If Mexico raises tariffs on these products in retaliation, the main replacement source would likely be European refiners.

Since this is a much longer haul trade, this would be a positive development for the product tanker market, in particular MRs, Poten concluded.


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