(Bloomberg) -- Canada’s energy patch may have temporarily dodged disaster in the trade war with the US, with President Donald Trump’s orders taxing crude at a lower rate and possibly letting producers avoid levies altogether on some shipments.
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The 10% tariff on US imports of Canadian energy is less than half the 25% rate the industry had braced for, a move White House officials said was meant to limit increases in gasoline and heating oil prices. The wording of the order also leads some analysts to believe Canadian producers won’t be taxed on shipments that simply pass through the US, allowing them to export significant volumes off the Gulf Coast without penalty.
“I would characterize this as annoying and insulting, but not cataclysmic for energy producers,” Eric Nuttall, a partner and senior portfolio manager at Ninepoint Partners in Toronto, said in an email.
Canadian heavy crude’s discount to US benchmark oil will probably widen to $16 to $17 a barrel, from $13 before tariffs, he said. The damage to producers also may be reduced as some of the added cost is likely to be absorbed by US refiners, especially those in the Midwest that are most dependent on Canada’s oil, Nuttall said.
Even with the buffers, the tariffs threaten to disrupt a North American energy market that has been highly integrated for decades. Canada sends nearly all its roughly 4 million barrels a day of oil exports to the US, making it America’s largest foreign source of crude.
American refiners benefit from the steady flows of relatively cheap, heavy Canadian crude that can be turned into fuel more profitably than the light oil produced domestically. The US Midwest, home to 23% of the country’s refining capacity, is particularly reliant on Canadian supplies shipped via pipeline and has limited ways to access alternatives.
The hit to light crude grades from Canada’s top oil-producing province of Alberta may also be substantial because they compete with abundant US supplies of similar oil. Nearly half of Alberta’s oil is either light, conventional crude or oil sands bitumen that has been upgraded into light synthetic oil. The discount for light Canadian grades may widen by $7 a barrel, said Susan Bell, a Rystad Energy analyst. The discount on synthetic crude is currently at $3.50 a barrel.