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Tariffs on Mexico could disrupt energy trade balance that favors US


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Tariffs on Mexico could disrupt energy trade balance that favors US

President Donald Trump's move to impose escalating tariffs on Mexican goods in order to pressure that country to curb migration could challenge U.S. refiners that are already coping with narrow light-heavy crude oil differentials.

The tariffs would start at 5% on June 10 and escalate by an incremental 5% on the first of each month through October to 25% "unless Mexico stops … allowing millions of people to easily meander through their country" on their way to the U.S., Trump tweeted June 1.

Tudor Pickering Holt & Co. analysts wrote May 31 that "even a 5% tariff" would cut the May 30 $6-per-barrel Maya crude oil discount to Brent in half.

"Mexico is a key supplier of heavy crude to the Gulf Coast refining system," the analysts wrote. "With sanctions on Iran, production cuts from OPEC, and limited egress out of Canada, these types of heavy barrels are already in short supply."

During the first quarter, Mexico accounted for 8.9%, or 56.0 million barrels, of the 628.9 million barrels of crude oil imported into the U.S., according to the U.S. Energy Information Administration. In March, the U.S. imported nearly 658,000 barrels per day of crude oil from Mexico, with Valero Energy Corp. accounting for just over one fifth of those barrels.

Mexico's national oil company, Petróleos Mexicanos SA de CV, known as Pemex, said it exported nearly 1.2 million barrels per day abroad in March.

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The tariffs could disrupt the energy trade balance with Mexico to the detriment of the U.S. At the end of November 2018, the U.S. became a net exporter of crude oil and petroleum for the first time on record, with most shipments reaching Latin America. Even as the U.S. runs a trade deficit with its neighbor to the south, it exports far more energy to Mexico than it receives.

Over the objection of some policy analysts, Mexico began construction of a new $7.6 billion, 340,000-barrel-per-day refinery to supply central Mexico and the country's Pacific Coast via a new fuel pipeline as part of Mexican President Andres Manuel Lopez Orbrador's plan to make the country more self-sufficient.

"Lower export earnings may support [Orbrador's] plans to instead use Mexican crude in six new oil refineries," Panjiva analyst Christopher Rogers wrote June 4. "Mexico's imports of refined oil outnumbered exports by 7.6:1 after an annualized growth of 17.6% in the past three years."

Analysts also warned of the potential for slowing economic activity from the tariffs, something that could weigh on gasoline and diesel prices from the demand side.

"Beyond the imports, this out-of-the-blue tariff announcement, which seemingly would violate the recently-negotiated USMCA deal on its face, just amplifies concern that trade conflicts are the new norm, and are going to drag down the economy," Mizuho analyst Paul Sankey wrote May 31. "One signal here is that trade restrictions aren't just a necessary evil to roll-back China's trade/currency/intellectual property intransigence before a move back to 'free trade,' but that President Trump's instincts are to use them as a first-line tool to address many international disagreements. [The] Market doesn't like that."

Panjiva is a business line of S&P Global Market Intelligence, a division of S&P Global Inc.