- Canada Redirects Crude Oil Exports as U.S. Market Faces Disruption.
- Mexico’s Crude Oil Exports Face New Challenges as U.S. Tariffs Take Effect.
- U.S. Seeks to Replace Canadian and Mexican Oil Imports from Europe and India.
The United States recently placed 25% tariffs on all imports from Mexico and Canada, except for a lower 10% tariff on Canadian energy products. The tariff on China has also been doubled to 20%, which is a big escalation of the trade tensions between the U.S. and its major trading partners. These new tariffs affect about $1.5 trillion worth of annual imports. Canada retaliated with step-by-step tariffs on $107 billion in American goods, and China raised tariffs of up to 15% on American farm products. Mexico’s government plans to announce its countermeasures shortly, reports Break Wave Advisors.
U.S. Tariffs Confirmed, Raising Revenue and Protecting Domestic Industry
The imposition of these tariffs dispels any speculation regarding whether President Trump would indeed carry out his threats to levy taxes on the U.S.’s biggest trading partners. For Trump, the tariffs are a way to generate revenue, particularly as tax reductions are looming on the horizon, and to defend domestic industries. There might be some individual exceptions to these tariffs, though, based on Commerce Secretary Howard Lutnick’s remarks.
The threat of these tariffs has already caused a 1.2% decline in the S&P 500, almost wiping out the gains the index had gained since Trump won the November election.
Effect on U.S. Oil Imports and Trade Flows
The tariffs will disturb current oil trade flows, particularly with Canada, which provides the U.S. with approximately 4 million barrels per day (b/d) of crude oil, primarily through pipelines. Around 330,000 b/d of this crude is shipped by sea. Canada will likely divert some of its crude to other markets in reaction to the tariffs. The nation can divert barrels from the U.S. Gulf and Midwest regions, but will struggle to shift these volumes unless oil imports are exempted. Canadian crude oil will also be diverted from U.S. markets via the TMX pipeline system, with available spare capacity permitting an additional 150,000 b/d to be diverted.
This trend will have a dramatic impact on the world oil market since Canadian crude would be reallocated to Asia, mainly China, while Europe and the rest of Asia might get increased Canadian oil from the east coast terminals of Canada. The Canadian oil destined for the U.S. Gulf would not be possible because there are chances that tariffs would be levied on it while transporting it.
Impact on Canadian and Mexican Oil Exports
The tariffs will also affect Mexico’s crude oil exports, which stand at 510,000 b/d, all of which are shipped by tanker to the U.S. Mexican crude oil will be diverted to Europe or Asia with the new tariffs. Alternatively, Mexico could boost domestic consumption if its new Dos Bocas refinery is able to raise production, although this is not certain given the underdeveloped refining industry in the country.
Also, Canada exports about 230,000 b/d of clean petroleum products (CPP), mostly gasoline and diesel, to the U.S. East Coast. Under these tariffs, this supply is likely to halt, compelling the U.S. to look for alternatives from Europe and India, provided the Russian oil ban on U.S. importers continues.
Replacement of U.S. Crude Imports and Effect on the Freight Market
Due to these interruptions, the U.S. will have to look for new sources of crude oil and products. Europe and India are likely to be the major providers of products, and the Mideast Gulf is likely the source for substitute sour crude. This may generate demand for additional Very Large Crude Carriers (VLCCs), particularly considering the OPEC+ plan to eliminate voluntary production cuts from April. The trade flow shift, specifically the rise in Mideast Gulf crude volume to the U.S. West Coast, is expected to sustain VLCC rates even after the shutdown of P66’s LA refinery in the second half of 2025.
Economic Impact of Tariffs: U.S. and Global Outlook
While such trade disruptions would bring short-term gains to tanker markets, the longer-term consequences of widespread protectionism are worrisome. A higher-tariff world would slow down economic growth and lower oil demand in the long run. The U.S. would suffer most from the economic impact. The Peterson Institute says that the tariffs Trump has already levied on China, Canada, and Mexico could cost the typical U.S. household more than $1,200 per year.
OPEC+ to Gradually Raise Oil Output from April
In a surprise development, OPEC+ has made plans to raise oil production gradually from April. The move will contribute 2.2 million barrels per day (b/d) in the next 18 months, with incremental monthly additions of 135,000 b/d until all the cuts are reversed by the end of 2026. The production cut reversal will temporarily increase demand for tankers, especially Very Large Crude Carriers (VLCCs), as more crude volumes enter storage, building up a contangoed market.
Despite higher production, the announcement has served to stabilize the VLCC market, which has experienced decreased activity over recent weeks even though busy fixing activity in International Energy (IE) Week. Brent crude prices have also continued to drop, falling most recently 1% to a five-month low of $70.60 per barrel.
OPEC+ Production Plan: Member Contributions and Future Demand for Tankers
A number of OPEC+ producers, such as Algeria, Iraq, Kuwait, Saudi Arabia, UAE, Kazakhstan, Oman, and Russia, will be boosting output. The five Mideast Gulf nations— Iraq, Kuwait, Saudi Arabia, UAE, and Oman—will add collectively approximately 100,000 b/d per month. If all of this added production is shipped out, it might add one to two vessels per month to demand for VLCCs, creating a need for an extra 26 VLCCs per month by September 2026.
Yet some of this crude will find domestic use, particularly with the relaunching of refineries such as Saudi Arabia’s Jizan refinery. If more crude is refined domestically, this will be beneficial to product tanker rates if the products made are exported.
China’s Crude Buying Behavior and its Impact on the VLCC Market
China’s crude purchasing behavior will be a major driver of the future of the VLCC market. Currently, Chinese onshore inventories are at 962.6 million barrels, the lowest since April 2024. If China starts restocking aggressively in reaction to falling oil prices and rising OPEC+ supply, it could give a huge lift to the VLCC market, boosting demand for long-distance oil shipments.
Kazakhstan’s Record Production and its Effect on Exports
The oil production in Kazakhstan hit an all-time high of 2.12 million b/d in February, an increase of 13% over January. The nation has increased production at its Tengiz field that has already affected export programs. The Kazakh production plan under the OPEC decision will increase its production quota to 1.473 million b/d in April and 1.55 million b/d towards the end of 2026. This increased output is set to generate further demand for tankers, especially Aframaxes.
Fading Russian Exports and the OPEC+ Role
Russian exports of oil have been falling, but it is not certain what portion of that is due to OPEC+ compliance and how much is attributed to the effects of sanctions and the Ukraine war. If Russia does boost exports according to its OPEC+ quota, this would lead to further demand for Aframaxes, and demand for around 20 more Aframaxes every month by 2026 would be created.
Global Oil Supply Dynamics and the Role of OPEC+
The potential OPEC+ production boost may be necessitated by the lack of compliance with production limits, especially that of Kazakhstan’s raised output. Global oil inventories are nonetheless comparatively low, and Iranian supply interruptions would potentially sweep away all but a residual excess. As exports from Iran are already cut off by sanctions, OPEC+’s greater supply may thus be central to balancing the market.
Coordination Among Major Oil Producers: The US, Saudi Arabia, and Russia
OPEC+’s decision to roll back production cuts poses some significant questions about coordination among the world’s three largest producers of oil: Saudi Arabia, the U.S., and Russia. Although the U.S. is outside of OPEC+, it has a great deal of impact on world oil markets, especially through domestic production policy and strategic reserves. Lower oil prices are also a preference of Trump, and this influences these dynamics.
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Source: Break Wave Advisors
