Diesel Market Poised for Impact from Canadian Oil Tariffs

Rising Benchmark Prices and Incremental Adjustments

The benchmark price for diesel has steadily increased for three consecutive weeks, although the overall market has experienced subdued fluctuations. The Department of Energy/Energy Information Administration's (DOE/EIA) weekly retail diesel price has risen by 1.2 cents to $2.677 per gallon, bringing the total price increase in the past three weeks to just 1.8 cents. This price serves as the basis for most fuel surcharges.

Volatility Limited in Futures Market

In the futures market, where the foundation for pump prices is laid, volatility has also been contained. While significant intraday price movements have occurred, they have largely offset each other. The latest settlement price for ultra low sulfur diesel (ULSD) on Tuesday was $2.4406 per gallon, nearly identical to the Feb. 7 settlement price of $2.4308.

Potential Impact of Tariffs on Canadian Oil Imports

The oil market is now anticipating the potential consequences of tariffs on crude imports, particularly those from Canada. The Trump administration's initial plan to impose tariffs on all imports, including energy, has been postponed until March 4.

Under the original proposal, Mexico and Canada would face 25% tariffs on all exports, with Canadian energy exports subject to a 10% tariff. Canadian imports will receive the most attention due to their primary mode of entry into the U.S. via pipeline connections, which limits the ability to redirect these imports elsewhere.

Significance of Canadian Imports and Potential Regional Impacts

Data from the EIA's monthly report shows that Canada exported approximately 4 million barrels of crude to the U.S. per day in November, accounting for roughly 40% of total crude imports. Ultra low sulfur diesel imports from Canada accounted for 119,000 barrels per day, representing approximately 97% of those imports.

The Upper Midwest (PADD2 in EIA's geographic data divisions) is expected to experience the greatest impact from tariffs on crude. PADD2 imports approximately 2.66 million barrels of crude per day from Canada, constituting the entirety of its crude imports. This region includes refineries in Chicago and the Great Plains that heavily rely on Canadian crude.

Price Implications and Supply Chain Adjustments

The Energy Policy Research Foundation (EPRINC) analyzed the potential impact of tariffs on oil product prices, using the Western Canadian Select (WCS) crude benchmark as a reference. EPRINC estimates that the implied annual increase in the cost of Canadian and Mexican imports could be $10.4 billion, resulting in an approximate 9-cent increase per gallon for regular gasoline at the current national average of $3.

The potential premium on PADD2 crude imports could disrupt supply lines, particularly due to the region's dependence on Canadian crude imports. However, the pipeline infrastructure is not currently configured to facilitate the large-scale movement of product to PADD2 from other regions. Alternative solutions, such as waterborne transportation or rail, could emerge, but these require time and may not be cost-effective.

OPEC+ Production Cut Delay

Another notable development is the likelihood that the OPEC+ group will once again delay increasing production. This marks the fourth time since 2022 that OPEC+ has postponed planned output increases. A Bloomberg report indicates that the global oil market is perceived as too fragile to warrant increased production at this time.