U.S. Refiners Face Headwinds as Trump Tariffs Bite

U.S. refiners are bracing for a potential hit to their profitability as President Trump's tariffs on Canadian and Mexican crude oil imports come into effect. The tariffs, which went into effect on March 2, 2025, are expected to increase input costs for U.S. refiners, potentially leading to higher gasoline and diesel prices for consumers. This article explores the potential impact of the tariffs on U.S. refiners and the stocks to watch in the coming months.



Impact on U.S. Refiners

The tariffs on Canadian and Mexican crude oil imports will increase U.S. refiners' input costs, as they will have to pay higher prices for the crude they import. According to the Energy Information Administration, Canada and Mexico accounted for about 65% of U.S. crude oil imports in 2020. With the tariffs, U.S. refiners will face higher input costs, which they may pass on to consumers in the form of higher gasoline and diesel prices.

For instance, the Yale Budget Lab estimates that Trump's tariffs could drive natural gas prices up 5% and gasoline prices up 1.6% on average in the long run. Rachel Ziemba, an adjunct senior fellow at the Center for a New American Security, said tariffs could add 20 to 30 cents per gallon on average in the near term. Certain regions like the Midwest, where refineries have been set up to work with heavier-grade Canadian crude, could take a bigger hit.

Irving Oil, a Canadian refiner that serves homes and businesses in northern New England, last month said tariffs will result in price increases for U.S. propane customers. Maryann Mannen, CEO of U.S. refiner Marathon Petroleum, said during a February earnings call that the majority of cost increases will "be borne by the producer and then, frankly, to a lesser extent, the consumer."

Potential Impact on U.S. Refinery Margins

The potential impact of the tariffs on U.S. refinery margins and the profitability of U.S. refining companies can be analyzed through the lens of the crack spread, which is the difference in price between where a refinery buys raw crude oil and sells the petroleum products it makes from this oil. The crack spread represents the profit margin made from "cracking" unrefined oil into higher-valued refined products.

The tariffs on Canadian and Mexican crude oil imports will increase the cost of crude oil for U.S. refiners. For instance, Canada supplied 60% of U.S. oil imports or 4 million barrels per day (bpd) of crude in 2024, and Mexico exported 450,000 bpd of crude to the United States. With a 10% tariff on Canadian oil and a 25% tariff on Mexican oil, U.S. refiners will face higher input costs.

Higher crude oil import costs may lead to lower refinery runs and reduced capacity utilization, as many U.S. refiners depend on the extra-heavy sour crude imported from Canada. This could result in erosion of refining gains and reduced profitability for U.S. refining companies. For example, ExxonMobil warned that it expects to book a weaker profit for the fourth quarter of 2024 due to lower refining margins.

Stocks to Watch

As U.S. refiners face increased input costs and potential erosion of refining gains, investors should keep an eye on the following stocks:

1. Valero Energy (VLO): Valero is one of the largest independent refiners in the U.S. and has a significant presence in the Gulf Coast region, which is a major hub for crude oil imports from Canada and Mexico. The company's exposure to higher input costs may impact its profitability in the coming months.
2. Marathon Petroleum (MPC): Marathon Petroleum is a diversified energy company with a significant refining segment. The company's refineries are primarily located in the Midwest and Gulf Coast regions, which may be particularly affected by the tariffs on Canadian and Mexican crude oil imports.
3. Phillips 66 (PSX): Phillips 66 is a diversified energy company with a significant refining segment. The company's refineries are primarily located in the Gulf Coast region, which may be impacted by the tariffs on Canadian and Mexican crude oil imports. However, the company's exposure to higher input costs may be partially offset by its integrated business model, which includes midstream and chemical segments.

In conclusion, the tariffs imposed by President Trump on Canadian and Mexican crude oil imports will likely have a negative impact on U.S. refinery margins and the profitability of U.S. refining companies. The increased cost of crude oil imports will reduce the crack spread, leading to lower refinery runs, reduced capacity utilization, and erosion of refining gains. While the reduction in U.S. refining capacity may help mitigate the impact of tariffs on refinery margins, it is not clear whether it will be sufficient to offset the increased costs of crude oil imports. Investors should keep a close eye on the stocks of major U.S. refiners in the coming months to assess the potential impact of the tariffs on their profitability.