U.S. President Donald Trump announced on Feb. 1, 2025, that his administration planned to impose a 10% tariff on Canadian energy imports effective Feb. 4, 2025. The president subsequently postponed these tariffs for 30 days pending ongoing negotiations with the Canadian government. If these tariffs take effect, we expect the financial effects of the tariff on both U.S. refiners and Canadian producers will be limited.

U.S. refining capacity is significantly higher than domestic oil production, making the country reliant on millions of barrels per day of imported crude oil.  The Energy Information Administration (EIA) estimates U.S. refining capacity is about 18.4 million barrels per day (MMbbl/d), while total crude oil production is about 13.3 MMbbl/d. Though the Trump administration may make it easier to drill on federal lands and garner drilling permits, we believe U.S. producers will maintain capital discipline and focus on free cash flow generation, limiting production growth. Accordingly, we expect the U.S. to remain dependent on imported crude to fuel its refineries for the foreseeable future.

Furthermore, many U.S. refineries are high-complexity that are specifically configured to run heavy crudes, which are not produced domestically. Accordingly, U.S. crude imports (with Canada being the largest source) are skewed toward heavy grades. U.S. refiners could shift crude slates to process lighter, sweeter, domestically produced crude, but we anticipate this would result in less efficiencies and lower utilizations.

Canadian oil represents more than 60% of current U.S. crude imports.   S&P Global Commodity Insights (SPCI) estimates total Canadian crude oil production for the first nine months of 2024 averaged roughly 5.7 MMbbl/d, with just over 70% of this production (or 4.1 MMbbl/d) exported to U.S. markets. This represents about 62% of total U.S. crude oil imports. Approximately three quarters of the Canadian barrels exported to the U.S. are heavy oil barrels. Most of these barrels flow to refineries in the U.S. Midwest (PADD 2).

Chart 1

In the U.S. Midwest and Rocky Mountains, refiners have physically integrated hardwired pipeline supply from Canada with no true alternative feedstock supply sources.  For the first nine months of 2024, PADD 2 and PADD 4 refineries collectively represented about 70% of the total Canadian heavy oil imports in the U.S. Many of these refineries are specially designed to process heavy, sour crude blends like Canada's Western Canadian Select (WCS) and have fixed pipeline sourcing for this Canadian crude. SPCI estimates Canadian crude represents about 56% of PADD 2 refinery crude runs and 44% of PADD 4 crude runs, with the balance being U.S. domestic supply. Accordingly, we expect PADD 2 and PADD 4 refiners' crude costs would increase with the announced tariffs given the lack of alternative non-tariffed supply sources.

Chart 2

Chart 3

Refineries on the U.S. Gulf Coast have more optionality to source crude from non-tariffed countries.   Exports to the Gulf Coast represented almost one quarter of total Canadian heavy oil exports to the U.S. for the first nine months of 2024. SPCI estimates roughly 12% of PADD 3 (Gulf Coast) refinery crude runs are Canadian crude imports, with another 19% from non-Canadian imports.

Chart 4

While Gulf Coast refiners could look to replace their current Canadian crude purchases with incremental imports from non-tariffed markets, alternative sources of heavy crude are not plentiful, and non-tariffed suppliers will have price leverage. We therefore expect increasing crude feedstock costs for these refiners as well, though likely not to the same extent as for PADD 2 and PADD 4 refiners. Ultimately, Canadian heavy barrels clearing on the Gulf Coast set the price of heavy crude in western Canada for the many Canadian producers who sell their crude in-basin in Alberta.

We believe Canadian producers will share the financial impact of tariffs given Canada's lack of alternative buyers for its production.  Canada has limited optionality to sell its crude to non-U.S. buyers given its limited tidewater access to ship crude from its coastlines to buyers in Europe or Asia. Apart from the recently expanded Trans Mountain pipeline system, which has capacity to move 890,000 bbl/d to Canada's West Coast where it can then be sold to Asia, there is scarce access to alternative global purchasers for Canadian crude. President Trump's executive order does, however, state that the duty would apply only to goods imported for consumption. In this case, Canadian producers could look to avoid the tariff by redirecting barrels currently sold to U.S. buyers to export hubs such as Cushing for the purpose of re-export to non-U.S. purchasers.

Canada also lacks the refining capacity to process most of its domestic crude oil production. SPCI estimates Canada's refinery runs averaged about 1.7 MMbbl/d for the first nine months of 2024, or only about 30% of the country's domestic production for the same period. Furthermore, most refineries in Canada were originally designed to process the light, sweet crude oil produced in Western Canada. Accordingly, unlike large complex U.S. refineries, Canadian refineries have limited capacity to process the increasing Canadian oil sands production without significant capital investment.

Given the inability of Canadian producers to easily redirect their current U.S. sales to other markets or process additional barrels domestically, we believe Canadian producers will share a portion of the financial impact of the tariffs with the U.S. refiners purchasing Canadian crude.

We believe the tariffs will likely lead to wider discounts on Canadian crude prices.  A widening WCS heavy oil differential could constrain many Canadian producers, given heavy oil represents the largest share of Canadian crude production and exports. The completion of the Trans Mountain Expansion project in May of 2024 resulted in a more stable WCS differential for the second half of 2024. SPCI estimates the differential averaged about $12.35/bbl in November 2024, the month before President Trump began threatening tariffs on Canadian imports. Since then, the differential has widened about 13%, with SPCI expecting the differential to average about $13.90 below West Texas Intermediate (WTI) for January.

On Feb. 3, 2025, the day the president postponed the tariffs, the WCS differential widened to just under $18/bbl. In our view, the differential would likely remain in the $13/bbl-$18/bbl range under our current $70/bbl WTI price assumption because an $18/bbl differential would absorb essentially the entire 10% import tariff when compared to the pre-tariff threat WCS differential of $12/bbl-$13/bbl.

Nevertheless, a weak Canadian dollar will offset the impact of discounted prices on credit metrics.  Recently the Canadian dollar has weakened meaningfully relative to the U.S. dollar, primarily because of the tariff risk. The Bank of Canada estimates the C$/US$ foreign exchange (FX) rate averaged 1.4390 for January of 2025 compared to 1.3975 in November of 2024. The Canadian dollar has weakened about 5% relative to the 2024 annual average FX rate of 1.3698. We expect the implementation of tariffs on all Canadian imports would keep the Canadian dollar at its current depressed level or weaken further.

However, a weaker Canadian dollar is largely beneficial to Canadian oil producers because their revenues are largely U.S.-dollar denominated since crude oil barrels are priced in U.S. dollars. Accordingly, a relatively stronger U.S. dollar results in higher top-line Canadian dollar revenue, all else equal. We therefore anticipate that a meaningful portion of any widening discounts on Canadian crude will be offset by a weaker Canadian dollar. Chart 5 shows the historical impact of fluctuations in the C$/US$ exchange rate on Canadian producers' realized price per barrel in Canadian dollars.

Chart 5

Accordingly, we anticipate no change to the credit ratings of our rated Canadian oil producers because of the newly enacted tariffs.  We believe it is unlikely Canadian producers will need to shoulder the entire financial burden of the 10% tariff given the reliance of many U.S. refiners on Canadian crude imports. However, even in such a case, we believe the impact to overall credit metrics would be relatively minimal due to the meaningful offset of a depressed Canadian dollar. Furthermore, most producers' balance sheets and leverage metrics are strong, as the industry remains focused on spending within internal free cash flow generation. While many producers have met their debt reduction goals and are now distributing significant amounts of free cash flow to shareholders, we believe many may reduce distributions to preserve liquidity and balance sheet strength if market conditions deteriorate below our current expectations.