By Avi Salzman

While the companies that buy imported products pay the tariffs on them -- potentially bad news for oil refiners -- few things are simple in the energy sector.

In the case of Canadian oil, which is about to face 10% tariffs in the U.S., the purchasers are the refineries that turn crude oil into fuel. But though refiners' costs look set to rise, investors seem optimistic about their prospects.

Some of the biggest names in refining were rising on Monday, even though the broader market was down. In mid afternoon, Valero Energy was up 1.6% and Marathon Petroleum had gained 0.6%.

A few other refiners with large exposure to Canadian oil were flat or falling. That includes HF Sinclair, Phillips 66, PBF Energy, and Par Pacific. But of those, only PBF Energy was down more than 1% in afternoon trading.

There are three main reasons that refiners were holding up well, and could persevere despite Trump's trade policy. The first is that the tariffs on Canada energy products were less drastic than expected.

Initially, Trump had floated the possibility of 25% tariffs on all Canadian goods, which would include energy. But he eventually settled on 10% for energy, a level that probably wouldn't cause big changes in how refiners operate. Refinery stocks fell last week on fears that they would be hit with 25% tariffs: The VanEck Oil Refiners ETF lost 2.1%.

Second, on a longer timeline, refiners have been hurt by low global gasoline demand, among other issues. The results is that when the tariffs came, the stocks weren't trading at high valuations that would make them vulnerable to a pullback. The VanEck ETF is down 20% over the past year.

The third reason that refiners are doing OK is that Canadian oil companies will probably have to absorb some of the hit from tariffs instead of passing it along to the refiners. Canadian producers have very few outlets for their crude, so they can't easily divert supplies to other markets. Historically, Canadian oil trades at a discount to U.S. crude of more than $10 per barrel.

As of Friday, the discount was about $15.50. Citi analyst Eric Lee projected that the discount could widen to $18 to $20.

JP Morgan estimates that Canadian producers could end up taking about 80% of the hit from the tariffs. Refiners would ostensibly share the remaining 20% with consumers, who would see higher gasoline prices.

"US refiners, facing increased feedstock costs due to the tariff, have the option to either absorb these costs through reduced profit margins or pass them on to consumers in the form of higher product prices," wrote J.P. Morgan strategist Natasha Kaneva. "In contrast, Canadian producers have few immediate alternatives for redirecting their oil exports."

Write to Avi Salzman at avi.salzman@barrons.com

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February 03, 2025 15:18 ET (20:18 GMT)

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