US refineries really need Mexican oil. Mexican fares will hurt their business



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Refiners on the US Gulf Coast depend on Mexico because it produces heavy oil that can be blended to produce gasoline, diesel, and jet fuel that purrs the economy. This heavy oil is already lacking because of the US crackdown on Venezuela.

The tariffs on Mexico – even at the 5% starting level that President Donald Trump has threatened – will further complicate the situation. US refiners will have to pay to buy oil elsewhere, which will result in higher energy prices than they would otherwise be.

"If these rates were maintained, US refineries would suffer a lot," said Michael Tran, general manager of RBC Capital Markets' global energy strategy. "It will aggravate the shortage of heavy barrels – at a time when you probably need it the most."

"Very few alternatives"

These concerns underscore the persistent dependence of the complex energy sector on foreign oil despite record US production.

The problem is that not all raw is created equally. While the United States is now the world's largest oil producer thanks to the shale boom, most of these barrels are very light. This high-quality crude oil hardly fits the decades-old refining system of the Gulf Coast. Shale oil is mixed with heavier barrels to allow refiners to maximize their production.

US refiners relied on Venezuela for their heavy barrels. However, US oil imports from Venezuela have disappeared because of the Trump government's sanctions against PDVSA. The United States imported zero barrels of oil from Venezuela last week, up from 517,000 barrels a day a year ago, according to the Energy Information Administration.

Normally, the United States would turn to Saudi Arabia, which also produces heavy barrels. But Saudi Arabia has reduced shipments to the United States as part of OPEC's efforts to raise prices.

Canada, another major producer of heavy crude oil, is already the largest source of imported foreign oil in the United States. And a shortage of pipelines from Canada will make it difficult to send much more.

"There are very few short-term alternatives," Ryan Fitzmaurice, energy strategist at Rabobank, wrote in a note to customers.

Refiners urge Trump not to price Mexico

US refiners will be forced to pay the 5% tariff for Mexican oil or, more likely, pay for heavy barrels elsewhere. Some of this oil will probably come from Colombia, Brazil, Ecuador, Iraq and Kuwait, which already ship heavy crude oil to Asia and elsewhere.

"You will have to compete with countries like China," said RBC's Tran.

Fitzmaurice warned that tariffs on Mexico would "reduce" refining margins and could limit the amount of gasoline, diesel and jet fuel being produced.

The energy industry has partnered with other business groups to urge Trump not to add Mexico to the global trade war.

Rates on Mexican imports will affect the US economy

"Imposing tariffs on Mexican products, especially crude oil, could drive up energy prices for US consumers, put the US refining sector at a disadvantage and jeopardize the USMCA's move – any bad result, "said Chet Thompson, CEO of American Fuel & Petrochemical Manufacturers statement Friday, referring to the New trade agreement that the Trump administration has negotiated with Mexico and Canada to replace NAFTA.

Shell, the US subsidiary of Royal Dutch Shell (RDSA), is the largest US importer of Mexican crude, with more than 131,000 barrels a day this year, according to ClipperData.
Valero has imported more than 128,000 barrels of Mexican oil a day this year, according to ClipperData. Plains All American (AAP), which owns energy terminals, imported 83,000 barrels a day from Mexico. Other major US importers of Mexican oil include: Phillips 66 (PSX), Lyondell (LYB) and ExxonMobil.

The tariffs on Mexico will be a "headwind" for the refining activity of the US Gulf Coast, according to Stewart Glickman, an analyst at CFRA Research.

In Mexico, 140 service stations operate under the Chevron Texaco brand. Chevron (CLC) expects to expand to 500 petrol stations in Mexico by the end of 2021. Chevron also owns and operates deepwater drilling properties off the coast of Mexico.

"Chevron is supportive of free and fair trade, and believes that the imposition of new tariffs must be weighed against the potential for retaliation that could hinder the development of new markets," Chevron said in a statement.

Increase the prices of gasoline?

The impact on energy prices is complicated.

Oil prices in the United States fell to their lowest level in three months last week because of fears that the trade war is slowing energy demand by slowing the global economy. Gas prices, which are changing with a lag, should also fall.

But US drivers should not celebrate yet. Analysts have warned that lower prices could be limited by Mexico's tariffs. US refiners, forced to pay for heavy crude oil, will bear at least some of the costs at the service stations.

The outgoing economist at the White House says that tariffs and deficits are bad for America

"The drop at the pump might not be as extreme as it would have been," said Matt Smith, director of commodity research at ClipperData.

The problem would be for Mexico to react by imposing its own tariffs on US products. More than half of all US gasoline exports in March went to Mexico. High tariffs imposed by Mexico could stop this flow.

"That would leave the US without a place to go, which would weigh on prices, which would be a boon to Trump," said Tran of RBC.

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