On Monday, the discount on Western Canadian Select crude versus U.S. benchmark West Texas Intermediate settled at around US$14.50 per barrel. That compares with US$16.25 a barrel on Friday and the January average of US$14.25.Jeff McIntosh/The Canadian Press
The chaos of an impending trade war with the United States has not yet roiled oil markets, but uncertainty about what’s next still looms over the sector at the start of a 30-day tariff reprieve.
That includes where crude might end up should demand ease from United States refiners, redirecting product to the Asian market as American companies balk at higher costs stemming from a 10-per-cent tariff on Canadian oil.
On the weekend, President Donald Trump said he would impose 25-per-cent tariffs on imports from Canada and Mexico, with a lower 10-per-cent tariff for Canadian energy imports. On Monday, he said the levies would be delayed 30 days after Mexico and Canada agreed to do more to improve border security.
Analysts are surprised that markets haven’t moved much in response to the tariffs. Even the slight bump to the differential – the gap between U.S. and Canadian benchmark oil prices – is less than expected.
On Monday, the discount on Western Canadian Select crude versus U.S. benchmark West Texas Intermediate settled at around US$14.50 per barrel. That compares with US$16.25 a barrel on Friday and the January average of US$14.25.
“The traders themselves, they thrive on the risk,” Susan Bell, senior vice-president of downstream research with Rystad Energy, said in an interview Tuesday. “Perhaps they thought that there was just too many unknowns and too many things they couldn’t call, so perhaps the risk was too great.”
Al Salazar, head of macro oil and gas research at Enverus, said while the differential isn’t completely immaterial, the sector has contended with far deeper discounts in recent years because of pipeline constraints and the hit to energy during the COVID-19 pandemic.
“For every dollar on a Canadian widening of a differential, it’s about $600-million lower in terms of revenue for the Alberta government,” he said in an interview. “It hasn’t forced anyone to shut in or anything like that, but it’s there.”
Analysts reckon any tariffs on oil will be short-lived. In a research note Monday, those at Bank of Nova Scotia said inflationary pressure on U.S. energy costs simply wouldn’t allow a prolonged hit.
Mukesh Sahdev, Rystad’s global head of commodity markets in oil, said the tariffs will likely result in a surplus of crude and refined products in Canada and Mexico, while driving shortages in the U.S. as the two countries redirect crude. That in turn could, affect U.S. refineries and lead to potential price hikes.
Where oil prices touched a high of near US$82 per barrel by mid-January, because of tighter Russian sanctions, Mr. Sahdev said in a research note that tariffs will likely keep prices in range of US$75 per barrel.
The expanded Trans Mountain pipeline system between Edmonton and Canada’s West Coast offers about 180,000 barrels b/d of spot capacity – pipeline space available on an as-needed basis. Ms. Bell said it will likely be snapped up to reduce deliveries to the U.S. and boost the flow of Canadian barrels to the coast, where it could potentially head to China and the broader Asian market.
But the fact that tariffs are to be 10 per cent – rather than the 25 per cent initially threatened by Mr. Trump – means there is less incentive to redirect crude oil from the U.S. market, she added.
“At the 25-per-cent tariff, there’s a lot of room to pay for incremental transportation. But at the 10-per-cent tariff, it gets a little bit more difficult to see that arbitrage there,” she said.
Industry and governments in Canada remain focused on lobbying U.S. officials amid the pause in tariffs.
Federal Natural Resources Minister Jonathan Wilkinson is in Washington once again this week to pitch an alliance focused on energy and minerals to legislators, executives in the energy and mining industry and the U.S. media. And Alberta Premier Danielle Smith will return next week to try to get the Trump administration to abandon tariffs and focus on what she called “win-win solutions on trade and security.”
Deborah Yedlin, president of the Calgary Chamber of Commerce, said that any oil company executives who thought they had their script ready last week for earnings calls are having to rewrite it for tough questions on U.S. trade.
The hardest thing to do is look past the maelstrom of mixed messaging from the White House and make decisions, she said.
“What the energy sector is doing now is saying, ‘Let’s see what actually comes into play, what that looks like, what kind of conversations we have in the meantime with everybody who’s buying our product, and understand better what we need to do,’” Ms. Yedlin said.