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US refiners hang on White House talks over Trump's Mexico tariff threat

Highlights

Escalating tariff would squeeze Gulf Coast refiners

Initial rate would add $3/b to Maya crude imports

Energy sector feels 'whiplash' after steel tariff relief

Washington — US refiners were watching Wednesday for any sign from White House talks on President Donald Trump's threatened 5% tariff on all Mexican products, but some expect the decision to come down to the wire Sunday night.

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A 5% tariff that escalates to 25% by October would have major implications across the US and Mexican energy sectors.

Gulf Coast refiners relied on Mexican crude as the top source for their March imports at 29%, ahead of Canadian (24%), Colombian (12%) and Saudi (11%) crudes, according to US Energy Information Administration data.

A 5% tariff would add about $3/b to the price of Mexico's Maya crude, cutting US Gulf Coast refinery coking margins for Maya to $4.95/b from the current May average of $8.08/b, S&P Global Platts margin data shows. A 10% tariff would shrink the margin to $1.82/b, and a 25% tariff would reduce it to minus $7.58/b, making imports of Maya uneconomical.

"Right now folks are scrambling to figure out -- if these tariffs go into place -- how to minimize the impacts that they're going to have on a wide range of industries, but particularly the energy sector," said Joshua Zive, an attorney and trade expert at Bracewell law firm in Washington.

White House talks

Mexican Foreign Secretary Marcelo Ebrard met Wednesday at the White House with US Vice President Mike Pence and Secretary of State Mike Pompeo.

Trump promised to impose the initial 5% tariff on Monday if Mexico does not take sufficient actions to stop the flow of Central American immigrants into the US.

The idea has drawn opposition from many Republican senators who support Trump. US Senator John Cornyn, whose Texas district is home to 31% of the country's refining capacity, said the Mexican tariffs would be a "massive tax" for US consumers.

Duncan Wood, director of the Wilson Center's Mexico Institute, thinks Trump will follow through on the tariff threat, but it remains to be seen if he will make any exception for energy trade.

Heavy crude shortage

The American Fuel & Petrochemical Manufacturers has emphasized the supply situation for heavy crudes in talks with administration officials.

"This is definitely going to hurt US refining," said Derrick Morgan, AFPM's senior vice president for federal regulatory affairs. "We've got a shortage of the heavier crudes on the world's stage, with Venezuela and Iran being taken off the market and Canada kind of being shut in for some time.

"Maya crude is a valuable source for our guys, and this is really going to make us less competitive."

Morgan said the group has also stressed the favorable trade balance for US refiners when they turn $14 billion worth of annual Mexican crude imports into $30 billion worth of refined products sold back to Mexico.

"We've got a really good thing going here by any calculation," Morgan said. "Taxing crude oil makes zero sense."

'Whiplash' after steel tariff relief

The tariff could also reverse the oil and gas industry's recent relief from 25% tariffs on steel products. In mid-May, the administration agreed to lift 25% tariffs on steel imports from Canada and Mexico, without instituting replacement quotas. Some in the industry were hopeful that model could be applied in other trade negotiations with key trading partners, and that the action boosted prospects of the US-Mexico-Canada Agreement.

In 2017, imports from Mexico accounted for 7% of US line pipe imports and 14% of oil country tubular goods important for production.

"We as an industry sector are feeling a bit of the whiplash and would prefer to have the certainty of enduring free trade because our ... companies have to make procurement decisions," said an oil and gas industry source.

When tariffs are lifted one day and appear to return a few days later, "it injects that uncertainty back into your supply chain and makes it very difficult to make bankable investment decisions and bankable procurement decisions," the source said.

Charles Riedl of the Center for Liquefied Natural Gas said he hoped for a quick reversal of any tariffs, "which could undermine the administration's hard work on building a world market for US energy."

"We especially value our business relationship with Mexico, which is currently the largest export market for US natural gas by pipeline and the second largest for US LNG," Riedl said. "Even a short-lived action can have a lasting impact on future opportunities," he said, pointing to a risk of creating "market uncertainty and less-than-ideal investment decisions that can impact markets for decades."

Mexican industrial demand for natural gas could also take a hit if US sales of manufactured goods from Mexico dip, he said.

The potential tariffs have also thrown into question momentum for the USMCA, another priority for the oil and gas sector because of the interconnectedness of the regional energy supplies.

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

--Maya Weber, maya.weber@spglobal.com

--Jeff Mower, jeff.mower@spglobal.com

--Edited by Jennifer Pedrick, jennifer.pedrick@spglobal.com