Trump's Tariffs Threaten Canadian Oil and Gas Exports to the U.S.

Canada's Minister of International Trade, Mary Ng, has warned that President-elect Donald Trump's proposed 25% blanket tariff on all Canadian exports could jeopardize oil and gas exports to the U.S. The threat, which has been looming for over a month, is finally starting to disrupt Canada's oil industry, with potential impacts on both Canadian producers and American consumers.



Canadian crude prices and shares of the country's producers had largely shrugged off the danger of an energy trade war since Trump first posted about the tariffs in November. Many speculated that his friendliness to the oil industry and promises to cut U.S. gasoline prices would prompt him to exempt energy products from the levies. However, this changed on Monday when Alberta Premier Danielle Smith warned that, after meeting with Trump in Florida over the weekend, she saw no reason to believe oil would be excluded from the tariffs. The comments sent an index of 43 Canadian energy companies down 1.4% on Monday, even as global oil prices and U.S. energy stocks rallied.

The tariff threat is now filtering into narrower gauges of crude prices. The price of heavy Canadian crude for delivery in the second quarter in Alberta fell to a discount of $15.75 a barrel below U.S. benchmark West Texas Intermediate crude on Tuesday, according to a trader familiar with the prices. That's down from a $14.70 discount on Monday.

"Any trade barriers that might be imposed on this free flow of trade could have a serious negative impact on the economies and consumers on both sides of the border," a spokesperson for oil sands producer Cenovus Energy Inc. said by email. US refiners, especially in the Midwest, take nearly all of Canada's crude oil exports, and all but one of the country's export pipelines go to the US. The newly expanded Trans Mountain pipeline to Vancouver allows as much as 15% of Canada's oil exports to be loaded onto tankers and shipped to Asia.



While Cenovus is partly shielded from the effect of the tariffs by owning production in Canada and refineries in the US, other fuelmakers in the American Midwest are poised to struggle. In Michigan, Wisconsin, Indiana, and Ohio, plants process almost 70% of the Canadian crude imported into the US, Cenovus said. "A 25% tariff on Canadian crude could increase gas prices at the pump by up to 30 cents or more per gallon," the company said.

Still, the tariff risk isn't fully priced into Canadian oil and gas shares yet, according to analysts at TD Cowen, who see potential downside of as much as 12% for some stocks. "It appears that the Canadian oil and gas equities have assumed a very low probability these tariffs will be implemented," analysts including Aaron Bilkoski and Menno Hulshof said in a report published Tuesday. Shares of Veren Inc., Strathcona Resources Ltd. and Baytex Energy Corp. are likely to fall the most if Trump does follow through on his threat, they said, while higher-margin companies including PrairieSky Royalty Ltd. and Topaz Energy Corp. — both energy royalty companies — are likely to see minimal impacts.

The analysts assumed that upstream companies bear a 15% hit to the price of their Canadian production, and that tariffs will be in place for a year.

Canada is ready to consider dollar-to-dollar retaliation or an export tax on Canadian oil and gas, if President-elect Donald Trump follows through with his 25% blanket tariff plans. "If you're going to put tariffs on Canada, what it actually will do is make things more expensive for Americans," Canada's minister of international trade Mary Ng told CNBC. Rather than engage in tit-for-tat tariff hikes, however Ottawa is looking to increase collaboration. If President-elect Donald Trump follows through with his threat to impose tariffs on Canadian goods, Ottawa is prepared to retaliate with levies that could take aim at the energy sector, Canada's minister of international trade, Mary Ng, said Thursday. "Everything is on the table," Ng told global markets reporter Seema Mody on CNBC's "Squawk on the Street."