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Why Trump's Tariff Threat on Mexico is Bad News for US Refiners

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With the United States planning to impose tariff on Mexican imports, refiners’ access to alternative heavy crude for the production of petroleum products is getting limited, said Sandy Fielden of Morningstar.  

It seems like there are reasons for energy investors to be concerned since the probable tariff might hurt domestic refiners in two ways.

US Plans to Slap Tariffs on Mexico

The United States is now planning to slap a 5% tariff on all goods being imported from Mexico. The rate is set to kick in by Jun 10 and will scale to as high as 25% by Oct 1, vows Trump.

The tariff program will stay in place until an immediate and urgent action is taken by Mexico to restrict the rising inflow of illegal immigration across the southern border.

US Refiners in Trouble

Rise in Input Cost

Per Reuters, the United States imports 600,000 to 700,000 barrels of oil from Mexico on a daily basis. Hence, a tariff against Mexico will hurt profits of U.S. refiners since the cost of buying Maya crude will rise. Notably, the cost of Maya oil will jump by roughly $3 a barrel, following a 5% tariff, which could halve the profit margin of American refiners, according to Bloomberg.

Investors should also know that the tariff implementation could raise the shipping cost for refiners in America if domestic refiners start purchasing heavier oil from producers far away.

Possibility of Mexico’s Retaliation

Moreover, the possibility of Mexico’s retaliation will hurt U.S. refiners as Mexico is the largest buyer of American crude and fuel in the world. Every day, the United States exports more than 1 million barrels of oil and fuel products to Mexico, per Reuters.

Which Refiners Will Suffer the Most?

Tariff action on Mexico will hurt key refiners importing significant Maya crude oil volumes. Here is a list of refiners which are likely to get affected the most.

According the U.S. Energy Information Administration (EIA), Royal Dutch Shell plc (RDS.A - Free Report) imported the highest volumes of crude from Mexico in February. The company, carrying a Zacks Rank #3 (Hold), imported 148 thousand barrels per day (MBbl/D) during the month, added EIA.

Valero Energy Corporation (VLO - Free Report) and Chevron Corporation (CVX - Free Report) are the second and third largest importers of Maya crude, accounting for 113 MBbl/D and 108 MBbl/D in February, respectively, per EIA. Other major refiners importing Mexican oil are Phillips 66 (PSX - Free Report) , Exxon Mobil Corporation (XOM - Free Report) and TOTAL S.A. (TOT - Free Report) . These refiners imported respective volumes of 70 MBbl/D, 37 MBbl/D and 35 MBbl/D in February — according to EIA.

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