Paisie: Impact of Tariffs, Sanctions and ‘Drill, Baby, Drill’

Much of the news so far this year has been dominated by external factors that can affect the oil market. These factors include the imposition of tariffs, the expansion of sanctions and calls for increased oil supply.

This month, we look at each of these factors and the expected implications.

Tariffs

Early in February, President Donald Trump imposed a 25% tariff on goods from Mexico and Canada, and 10% on energy, including oil. While these tariffs were quickly withdrawn, at the time of this writing, the withdrawal was temporary, and the tariffs could be reimposed in 30 days.

The U.S. is the major destination for Canadian crude exports (more than 90% of Canada’s total crude oil exports) with the U.S. importing around 4 MMbbl/d from Canada, which represents around 60% of total U.S. crude imports. (The U.S. also exports around 4 MMbbl/d, so, on a net basis, the U.S. imports about 2.5 MMbbl/d).

Last year, Canada completed a new pipeline to move crude oil to the West Coast—the TMX pipeline with capacity of 590,000 bbl/d—and to complement the Trans Mountain pipeline with a capacity of 300,000 bbl/d. Since July 2024, the West Coast has averaged 444,000 bbl/d of crude imports from Canada, which is an increase from 308,00 bbl/d during the first half of 2024.

While the U.S. is dependent on crude oil from Canada, it is also true that Canada is dependent on the U.S. as a market for its crude exports. Logistically, Canada has, in practical terms, nowhere else to go with its crude oil exports. Additionally, since a substantial portion of Canadian crude oil is heavy (around 21° API), there are only a selected number of refineries with the capabilities to process Canadian crude outside of the U.S.

Because of quality attributes and logistical challenges, Canadian heavy crude is priced at a significant discount compared to U.S. crude (Western Canadian Select is priced about $14.50/bbl less than WTI). With consideration of these factors, while the tariffs would add some friction, we do not think that the tariffs would have any material impact on Canadian oil production nor exports to the U.S.

Sanctions

In January, before leaving office, President Joe Biden imposed additional sanctions on Russia’s military capabilities and energy sector. The energy-related sanctions encompass more than 200 entities and individuals, including Gazprom Neft and Surgutneftegas, as well as traders, oil service providers and government officials.

Besides sanctions on Russia, Trump has stated that he will impose sanctions on Iranian oil exports with the goal of reducing Iran’s oil exports by 500,000 bbl/d to 750,000 bbl/d from its current level of around 1.6 MMbbl/d, of which, around 90% of the exports are going to China. There could also be a return of tighter sanctions on Venezuela oil exports, which exported around 775,000 bbl/d in 2024, the highest level since 2019.

We still have doubts with respect to the lasting effectiveness of the sanctions for several reasons. While a couple hundred Russian tankers have been sanctioned, Russia’s shadow fleet is thought to be around 800 tankers, and Russia can augment this fleet by purchasing additional older tankers. Russia can also increase the utilization of ship-to-ship transfers and other maneuvers to reduce transparency.

Iranian crude exports are closely linked to China and are done with the use of Chinese currency and non-Western shipping services. While one-third of Venezuelan exports go to the U.S., the remaining two-thirds go to China.

Calls for increased oil supply

At the World Economic Forum, Trump called for OPEC to lower oil prices by increasing production. We do not expect that his statements will have much influence on the strategy of the members of OPEC+. Instead, we expect that OPEC+ will remain cautious with respect to increasing supply while assessing the strength of oil demand growth and the impact of energy policies of the Trump administration.

OPEC+ will need to balance these factors with the need to maintain cooperation among their members—including with those members pushing for more production—notably UAE and Iraq.

Trump also issued executive orders that are supportive of the U.S. oil and gas sector. We do not think that the related push for additional supply will have much influence on the strategy of U.S. shale producers, which are focused on maximizing returns and free cash flow generation—and not production growth.