Industry says that the US dependence on Canadian oil should discourage Trump tariffs

Canada's oil industry doesn't expect tariffs to be included in the protectionist measures proposed by Donald Trump, U.S. president-elect. This is because U.S. refineries depend on Canadian barrels.

Some Canadian oil industry players saw Trump's victory as a positive, which would encourage energy investment in North America. It could also boost the value of U.S. dollar that Canadian producers get for their crude. Some however, said that any increase in U.S. production of oil and gas could put Canadian exports into competition with other countries.

Canada is the fourth largest oil producer in the world and the sixth largest natural gas producer. Canada's 4 million barrels of crude oil per day (bpd), or 85% of the total, are exported to the U.S. Any slowdown in the energy trade will have a significant impact on the Canadian economic situation.

Trump has floated a proposal to impose a tariff of 10% or more on all imports into the U.S. Analysts in the industry say it is unlikely that Canadian oil will be included, as its quality differs from that of U.S. produced grades.

Jeremy McCrea, analyst at BMO Capital Markets, said: "There's no other option available if you slap on a bunch o' tariffs for Canadian Oil."

The U.S. Midwest and Gulf Coast have many refineries that have upgraded their units to handle heavy Canadian crude oil. This Canadian crude is more difficult to refine, and thus usually cheaper, than the U.S. light shale.

Nearly all the refinery feedstock in the Midwest region, which supplies major cities like Chicago and Detroit with fuel, comes from Canada. Tariffs on crude imports will likely increase refiners’ costs and raise fuel prices for consumers.

Rory Johnston of Commodity Context said that the chances of Trump imposing a tariff on Canadian barrels is extremely low. However, any trade measures will also harm Canadian producers, as they have limited options for exporting elsewhere.

He said that a slowdown in U.S. crude purchases would likely cause a bottleneck in Alberta, driving Canadian crude prices down. A 20% tariff, he estimated, could double the current discount for heavy benchmark crude.

Johnston stated that the fact that it's a risk highlights how vulnerable the Canadian oil industry is to U.S. policies.

The media team of Donald Trump did not respond immediately to a comment request.

PRO-BUILD PRESIDENT

While the idea of tariffs was concerning to the Canadian oil industry, it also showed that fewer regulations in the oil and gas sector could have a positive impact on Canadian policymakers.

Tristan Goodman is the CEO of Explorers and Producers Association of Canada. He said, "This president is pro-development and probuild, and some of this investment will also extend to Canada."

Goodman stated that Trump's reelection could force Canada's businesses and government to invest in order to improve Canada's productivity, or else risk falling behind the U.S.

He said, "It is definitely more positive than it is negative. However, there are still a few unknowns."

The U.S. Dollar rose against the Canadian Dollar after Trump's victory, but the Loonie recovered those losses in the second half of the week. The Canadian dollar is nearing a two-year high and is expected remain under pressure. McCrea of BMO said that this could be a boon for Canadian oil producers who pay their operating costs in Canadian Dollars but sell barrels at U.S. dollar prices.

Ottawa released a draft regulation last week for an oil and natural gas emission cap, which many industry executives claimed would lead to production reductions. The Conservatives in opposition, who are leading the polls ahead of an election due within the year, said that they would repeal those measures.

Some executives of companies also believe that an increase in U.S. production and exports of oil and gas could shunt Canadian exports into other parts around the world.

According to the Canada Energy Regulator (CER), 97% of Canada’s C$124 billion ($89.48billion) oil exports will go to the U.S. by 2023. However, the Trans Mountain expansion, which began this year, is increasing exports to Asia.

Shell's LNG Canada terminal is set to begin operations next year. Other LNG export terminals will be built.

Michael Belenkie is the CEO of Advantage Energy, a mid-sized Canadian producer.

(source: Reuters)