Mexico and Canada hit by US tariffs, but specific exemptions still possible
The US imposed 25% tariffs on all Mexican and Canadian imports yesterday — save for a lower 10% levy on Canadian energy – and doubled the charge on China to 20% (which had been the only country so far to have tariffs imposed on its goods by the US during Trump’s second term term). Together, the measures apply to roughly $1.5tn in annual imports.
Canada has hit back with phased levies on $107bn worth of US goods, while China imposed tariffs as high as 15% on its US imports, mainly on American agricultural shipments. Mexico said it will announce retaliatory measures on Sunday.
The confirmation of the levies lays to rest doubts over whether the US president would follow through on his repeated threats to impose tariffs on the US’s biggest trading partners. For Trump, tariffs are a way to raise revenue (more tax cuts are pending) and support domestic industry. But some specific exceptions to tariffs could still be seen, according to comments from Commerce Secretary Howard Lutnick.
The S&P 500 fell 1.2% on Tuesday, nearly erasing all the gains it had accrued since Trump was declared winner of the presidential election in November.
Changing flows
The US imports around 4m b/d of crude oil from Canada, mostly via pipelines. Only around 330k b/d is seaborne.
We expect Canada to redirect some barrels piped to the US midcontinent and US Gulf central states. What it can’t redirect it will have to discount to move to US markets, but US refiners will doubtless also have to pay up unless exemptions are made for oil imports.
Canadian crude oil will be redirected from the US Midwest via the TMX pipeline system for export to elsewhere. Current spare capacity in the TMX pipeline is around 150k b/d. In total, that would mean around 1m b/d of Canadian crude oil is likely to be diverted from US markets. Most of this is likely to continue moving on Aframaxes, but with voyage lengths more than doubling on average.
Canadian crude moved to the US West Coast will likely head to China, while Europe and Asia could take more Canadian oil from its east coast ports. Canadian oil is unlikely to be exported from the US Gulf because of the risk of tariffs hitting it on transit.
TMX crude has already seen more going to Asia, specifically China, after the tariffs were first threatened in January. Crude from TMX to the US west coast fell from 186k b/d in January to 156k b/d in February, while those to China increased from 185k b/d to 205k b/d. In response to the threatened tariffs firms have announced plans to start nighttime loadings at the TMX terminal in Vancouver.
US crude oil imports from Mexico are around 510k b/d, all by tanker. We would expect Mexican crude oil will head Europe or Asia instead of the US. Alternatively, the country may consume more of its crude domestically if its new Dos Bocas refinery (and the rest of its rickety refining system) can ramp up production.
Around 130k b/d of fuel oil goes from Mexico to the US Gulf, mostly on Panamax/LR1 tankers.
Around 230k b/d of CPP (mostly gasoline and diesel) goes from East Coast Canada to the US Atlantic Coast, mostly on Handies. We expect all of this will stop going to the US.
The US will need to replace Canadian and Mexican crude oil and products. Europe and India are the most likely suppliers of products (assuming there is no lifting of the Russian oil ban for US importers within the next few weeks) and the Mideast Gulf the likely supplier of replacement sour crude barrels, especially with OPEC poised to start unwinding its voluntary production cuts from April (an extra 138kb/d per month is expected).
The latter would support VLCC rates - even allowing for the loss of crude import demand into the USWC because of the closure of P66 LA refinery in H2 2025. A Mideast Gulf to USWC voyage is around ten times the distance of a Vancouver to USWC voyage.
Economic concerns
Beyond the reshuffling of trade flows, tariffs will hit the US and global economy. Short-term disruptions are positive for tankers but longer-term a world of trade barriers will lead to slowing economic growth and weaker oil demand growth.
The US is likely to be the hardest hit. The tariffs that Trump has already imposed on China, Canada and Mexico would cost the typical US family more than $1,200 per year, the Peterson Institute said.
OPEC to go ahead with production increase in April
OPEC+ has announced a gradual increase in oil production starting in April. The decision will see the return of 2.2m b/d over the next 18 months, with incremental monthly increases of around 135k b/d until the cuts are fully reversed by late 2026. While the surprise announcement is nominally bullish VLCCs as it raises the possibility (temporarily at least) of boosting volumes even if they move into storage and creates a more contangoed market. The announcement has stemmed the loss of confidence of confidence in the VLCC market which has fallen in the last week despite busy fixing activity during IE week. Brent crude prices declined1% on Tuesday to a five-month low of $70.60 per barrel, following a 2% drop on Monday.
Eight OPEC+ members – Algeria, Iraq, Kuwait, Saudi Arabia, UAE, Kazakhstan, Oman and Russia – are set to increase production while maintaining “flexibility” to pause or reverse the production ramp-up based on market conditions. The move reverses voluntary production cuts that began in July 2023.
The five Mideast Gulf countries increasing production under the plan – Iraq, Kuwait, Saudi Arabia, UAE, and Oman – collectively add around 100k b/d each month in production. If all of the additional production went to export it would add demand for around one to two more VLCCs a month ultimately creating demand for an additional 26 VLCCs a month by September 2026. But the restart of refineries in the region, such as Saudi Arabia's Jizan plant, may mean some the crude is instead used domestically. In that case, the reversal of the cuts could be supportive of product tanker rates if the resulting product is exported.
China's crude buying behaviour will be a key factor. Current Chinese onshore inventories stand at 962.6 million barrels, the lowest level since April 2024. If China begins restocking aggressively in response to lower prices and increased OPEC+ supply, the VLCC sector would likely benefit.
Kazakhstan’s production has hit a record high of 2.12m b/d in February, a 13% increase from January, according to Reuters. The increase in production at the Tengiz field is already being felt in export programmes. CPC exports rose to 1.6m b/d in February, compared to 1.3m b/d in 2024 on average. The production plan announced by OPEC raises Kazakhstan’s production quota to 1.473m b/d in April and 1.55m b/d by Sep-Dec 2026.
Russia’s exports have been declining, but it’s unclear how much this complied with OPEC and how much because of a decline in the country’s oil sector from the impact of the war and sanctions. If Russia does boost exports by its allowed amount, it would equate to demand for around one extra Aframaxes a month, leading to the equivalent of around 20 additional Aframaxes per month by September 2026.
OPEC may have been prompted to reverse the cuts now because of difficulties with getting members to comply with quotas. Alongside Kazahkstan's increase production at its Tengiz field. the UAE has also been pushing to be allowed to produce more (and in fact has been consistently overproducing).
At the same time, worldwide stocks are relatively low. While US production is stagnating and is unlikely to grow despite Trump’s assertions. Disruption to Iranian output would remove most of the current surplus. Iranian exports are estimated to have declined to 1.35m b/d on average during January and February, as compared to their 2024 average of 1.7m b/d. Reports indicate longer storage durations for Iranian barrels in Southeast Asia due to tightening buyer and tanker availability. Should these volumes remain constrained, the incremental OPEC+ supply will play a crucial role in offsetting the shortfall.
Finally, the decision to increase production raises questions about potential coordination between the world's three largest oil producers: the US, Saudi Arabia, and Russia. While the US remains outside OPEC+, its influence on global oil markets is undeniable, particularly through its domestic production policies and strategic reserves and Trump's preference for lower oil prices is well-known.