Tariff or no tariff, more TMX crude will find its way to Asia

Last week, US President-elect Donald Trump threatened to impose a 25% tariff on crude oil imports from Canada. If enacted, this move would throw US refineries into disarray and prompt Canadian oil exporters to redirect shipments to Asia. Since refiners need to blend the heavy sour North American crude with lighter components, grades such as WTI, ESPO, and Murban are expected to see increased demand in Asia as a result of the trade reshuffle.

While imposing a hefty tariff on nearly a quarter of US crude imports may seem self-destructive, Trump’s intention is to gain greater leverage in renegotiating the USMCA with its two neighbouring countries in 2026. Discussions or threats of imposing tariffs until counterparties concede are a familiar tactic for Trump, who briefly levied tariffs on some Canadian goods, including steel and aluminium, in 2018. The reality that around 70% of the crude oil processed in US refineries in the landlocked midcontinent region comes from Canada means Washington’s victory would come at the price of bleeding itself dry. The lack of alternative supplies would inevitably drive-up feedstock costs and, consequently, consumer prices at the pump.

Regardless of whether tariffs on Canadian crude oil are actually imposed, the US is expected to see reduced consumption for heavy sour crude next year due to the planned closures of LyondellBasell’s 268 kbd Houston refinery in Q1 and Phillips 66’s 139 kbd Wilmington refinery in Q4. This decline in demand for heavy sour crude will put downward pressure on WCS Hardisty prices and push Canadian oil exporters to seek new markets for their shipments. WCS Hardisty differentials against WTI currently stand at about -$12/bbl, a whopping 54% y/y increase, as the launch of the TMX pipeline reduced apportionment on Enbridge’s Mainline pipeline and expanded export capacity to Asia-Pacific markets. Lower demand in PADD 3 and PADD 5 may lead to some $2/bbl drop in WCS Hardisty, not to mention the daunting 25% tariff threat, which could easily push discounts to $20 or even $25/bbl.

WCS crude differentials, $/bbl

Source: Argus Media

Either way, Asian refiners are bracing for an increase in TMX supplies and a corresponding decrease in pricing. The high-TAN Access Western Blend (AWB) is trading at -$4/bbl against ICE Brent for February delivery on an arrival basis in China, making it one of the cheapest options among non-sanctioned oil supplies, while the low-TAN Cold Lake crude is priced at around -$3/bbl against ICE Brent. Since operations began in May, China has been the largest destination for TMX cargoes, accounting for 90% of the Asia-bound shipments. India received three Aframax cargoes in July, South Korea accumulated 1.68 Mbbls, and Japan and Brunei each took one cargo. Japanese Eneos recently purchased an Aframax-sized Cold Lake crude shipment from the TMX system for February delivery, marking its second such purchase. Lower Canadian crude prices could trigger additional demand from both existing and new buyers, as AWB is currently more expensive than Ecuador’s Oriente on a delivered Asia basis.

Due to the characteristics of TMX grades, refiners must blend them with lighter crude to increase the API and lower the TAN, ensuring they meet refinery gate standards. Generally, refineries in Japan and South Korea can only process crude with a TAN of around 0.8-0.9 mg KOH/g, while Chinese refining complexes have a higher tolerance at slightly above 1 mg KOH/g. Higher acidity levels, however, can cause corrosion in facilities and require more frequent maintenance. Lighter crudes, such as Murban, WTI, and the Russian light sweet grades ESPO and Sokol, could be considered ideal options in terms of quality and economics for blending with TMX crude. With the blending ratio of TMX crude to lighter grades at 1:1 or even 1:2, any further increase in TMX procurement could pose challenges for refinery crude storage capacity, potentially acting as a natural limit on their TMX liftings, even if prices were to plunge. Nonetheless, if Asian refiners take more TMX cargoes following reduced demand in the US, medium-density crude prices could come under greater pressure from the TMX and light crude blend. In fact, China’s imports of medium sour crude from the US have dropped to 79 kbd in the first 11 months of 2024, down from 124 kbd in 2023.

An increase in TMX shipments to Asia will also be welcome news for the Aframax and VLCC tanker markets, which have struggled in recent months due to weakened oil demand. While WTI crude is expected to face stiffer competition in Europe next year from rising Latin American supplies, growing TMX exports will encourage tanker owners to redirect their vessels from trans-Atlantic to trans-Pacific routes.

Average API density of crude imports at ZPC, ° API

Source: Kpler

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