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US President Donald Trump's threat to impose a 5% tariff on all Mexican imports effective June 10 would hit US Gulf Coast refiners' top source for crude imports and raise the prospect of damaging retaliatory tariffs on booming US refined product exports.

US Gulf Coast refiners have become increasingly dependent on heavy barrels from Mexico and Canada since US sanctions cut off supply of Venezuelan crude earlier this year.

American Fuel & Petrochemical Manufacturers urged Trump not to impose energy tariffs on "one of our most important trading partners."

"Imposing tariffs on Mexican products, particularly crude oil, could raise energy prices for US consumers, disadvantage the US refining industry and jeopardize passage of USMCA -- all bad outcomes," AFPM President Chet Thompson said, referring to the proposed North American trade deal intended to replace NAFTA.

The oil industry is waiting for word of the White House's notice to US Customs and Border Protection instructing it how to impose the tariff and whether to make any exemptions for certain products.

The Gulf Coast imported 603,000 b/d of Mexican crude in March, far outpacing the second and third top sources: Canada, 500,000 b/d, and Colombia, 246,000 b/d, according to the latest Energy Information Administration monthly data.

Likewise, Mexico is the top destination for refined products exported from the US refining hub. The Gulf Coast exported 1.14 million b/d to Mexico in March, 27% of its total products exports.

Mexico took 56% of all US gasoline exports and 23% of all diesel exports in 2018, EIA data showed.

A 5% tariff would add about $3/b to the price of Mexico's Maya crude, cutting the US Gulf Coast refinery coking margins for Maya to $4.95/b from the current May average of $8.09/b, S&P Global Platts margin data shows. A 10% tariff would bring that margin down to $1.80/b.

A 25% tariff on Maya crude would put the USGC coking margin at minus $7.63/b, meaning refiners would be running the crude at a loss.

Platts margin data reflects the difference between a crude's netback and its spot price. Netbacks are based on crude yields, which are calculated by applying Platts product price assessments to yield formulas designed by Turner, Mason & Co.

THREAT OF 25% TARIFF BY OCTOBER

Trump tweeted late Thursday that he would impose the tariff on all Mexican imports unless illegal immigration stops on the southern border.

Acting White House Chief of Staff Mick Mulvaney told reporters during a briefing that the tariffs would increase from 5% on June 10 to 25% by October.

"If the Mexican government is incapable of or unwilling to assist us in resolving the situation at our southern border, that tariff will go to 10% on July 1, 15% on August 1, 20% on September 1, and 25% on October 1," Mulvaney said. "It is our very firm belief that the Mexican government can and needs to do more to help us with the situation on the southern border."

Mexico will try to negotiate with the US administration on recently announced 5% tariff before taking any retaliatory measures, President Andres Manuel Lopez Obrador said Friday.

"All conflicts in bilateral relations have to be solved with negotiations and dialogues without coercive measures," Lopez Obrador said in a webcast press conference.

The Mexican president said he has several options for retaliating against potential US tariffs, without going into detail. He did not address impacts to the energy sector.

Lopez Obrador campaigned for election on the promise of easing natural gas, power, and retail gasoline prices. Mexico depends on US imports for 80% of its domestic gas supply.

Mexican Foreign Minister Marcelo Ebrad said Friday he would head to Washington shortly to talk about the tariff threats.

Joshua Zive, a lawyer and trade expert at Bracewell, said the White House could exempt oil and gas from the tariff if it wants to lessen the burden on the US energy industry and US consumers.

"There's nothing restricting the administration's ability to make exceptions as justified by economic or national security rationales," Zive said.

"We know that folks inside the administration have been sensitive to the economic impacts of energy costs," he added. "I think there's reason to believe that they would be receptive to these concerns, but it remains to be seen what action could be taken."

Top importers of Mexican crude in February (b/d):
Shell Oil Deer Park 148,000
Valero 113,000
Chevron 108,000
Houston Refining 86,000
Phillips 66 70,000

Source: Energy Information Administration

STRONG MEXICAN DEMAND FOR US GAS

US import tariffs are unlikely to have any immediate impact on Mexico's demand for US natural gas. A retaliatory tariff from Mexico would not likely be placed on US natural gas imports given how reliant the country is natural gas for power and industrial demand.

However, if US tariffs slow Mexico's industrial growth, Mexico's gas demand from industrial and manufacturing sectors could fall.

Platts Analytics estimates the Mexico industrial demand for natural gas averaged 2.4 Bcf/d in 2018, representing 30% of Mexico's total gas demand.

Domestic natural gas production averaged 2.7 Bcf/d in 2018, down 1.8 Bcf/d, or 40%, over the past five years as Pemex has struggled to maintain crude oil production. Last year, Pemex consumed roughly 66% of total domestic gas production for enhanced oil recovery, petrochemical, and refinery uses - leaving just less than 1 Bcf/d for private end users.

Mexico has no underground natural gas storage so the national pipeline operator CENAGAS turns to LNG imports to balance supply and demand - pushing end users fees to as high as $25/MMBtu.

US natural gas pipeline exports in 2018 made up nearly 60% of Mexico's total natural gas supply stack - an increase from just 26% over the past five years.

Platts Analytics forecast US pipeline exports to average 6.4 Bcf/d in 2020, a significant increase from the year-to-date average of 4.7 Bcf/d.

Growing natural gas demand in Mexico stems from increasing electricity consumption per capita, natural gas-fired power plants, and from the industrial manufacturing sector. Additionally, cheaper US supply is expected to displace roughly 0.6 Bcf/d of Mexico LNG imports over the next five years.

-- Meghan Gordon, meghan.gordon@spglobal.com

-- Daniel Rodriguez, daniel.rodriguez@spglobal.com

-- Janet McGurty, janet.mcgurty@spglobal.com

-- John Hilfiker, jhilfiker@spglobal.com

-- Edited by Jeff Mower, newsdesk@spglobal.com