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Trump's Mexican tariffs could hit US refiners, raise fuel cost

Houston

US President Donald Trump's threats to tax Mexican imports could disrupt a long-standing cross-border energy trade, hitting US consumers and refiners that use Mexican oil by boosting prices, and raising concerns about potential retaliation by the world's biggest buyer of US energy products.

Mexico sends 600,000 to 700,000 barrels of oil to the United States every day, mostly to refiners that process that crude into gasoline, diesel and other products. Mexico buys more than one million barrels per day (bpd) of US crude and fuel, more than any other country, and analysts are concerned that retaliatory tariffs from Mexico could disrupt that trade.

Mr Trump last Thursday vowed to impose a tariff on all goods coming from Mexico, starting at 5 per cent and increasing monthly until the surge of undocumented immigrants from across the border subsides.

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Mexico and the United States, along with Canada, are trying to finish a broad free-trade agreement to replace the 25-year-old Nafta deal. If implemented, the tariffs would begin June 10. So far, Mexico has not said it would retaliate.

The imposition of tariffs may spur "retaliatory actions that impair the development of new markets", said a spokesman for Chevron Corp, adding the company supports free and fair trade. Chevron has opened 100 retail gasoline stores in Mexico since 2017.

Trade group American Fuel and Petrochemical Manufacturers warned tariffs could raise domestic fuel prices and jeopardise the proposed trade deal. The American Petroleum Institute said the tax could hurt the US economy.

Tariffs could add US$2 million to the cost of daily Mexican crude purchases by US refiners, analysts at PVM Oil Associates said.

A sharp decline in supplies from Mexico could raise the cost of fuels overall if US refiners are forced to buy heavier crude grades from further away, adding to shipping costs.

However, crude traders noted that most Gulf Coast refiners that buy Mexican crude are located in so-called Foreign Trade Zones, which allow them to avoid tariffs so long as the refined products are exported, though these refiners also supply US markets.

Refiners have been using Mexican heavy crude grades in part to offset the loss of barrels from Venezuela, which has been under US sanctions for months.

Maya crude, Mexico's primary grade of oil, traded at a US$6 a barrel discount to Brent, the international benchmark, on Thursday, according to analysts at Tudor, Pickering & Holt (TPH). They said a 5 per cent tariff would reduce that discount by half.

Discounts on Friday for Western Canadian Select, a rival grade to Maya, was bid at a US$16 a barrel discount to US crude, narrowed from US$16.60 on Thursday, traders said.

The primary importers of Mexican crude include refineries owned by Valero Energy Corp, Phillips 66, Exxon Mobil Corp and Chevron Corp. Mexico accounted for about 9 per cent of total US oil imports last year, TPH said.

US refiners use heavy crude oil to blend with lighter US oil to produce fuels, but reduced production from Canada and Mexico, along with sanctions on Venezuela, has squeezed that supply.

"For Gulf Coast refiners already hit by Venezuela sanctions, Iran sanctions, Canada's cuts and Opec cuts, this adds insult to injury," said Sandy Fielden, an analyst at researcher Morningstar. "The number of alternative sources of heavy crude is narrowing."

Weekly data shows US imports from Mexico since the beginning of March have averaged roughly 631,000 bpd, according to US Energy Information Administration figures.

Phillips 66, Marathon Petroleum Corp and Exxon declined to comment. Refiners Valero Energy and Royal Dutch Shell did not reply to requests for comment. REUTERS