Canadian energy stocks have always had a place in many Canadians’ portfolios due to their excellent dividend yields, however, investor sentiment has been changing due to Trump’s announcement of tariffs on Canadian goods less than a month after his return to the White House, with a 10 per cent tariff on Canadian energy products.
Due to its closest proximity, comprehensive pipeline infrastructure and limited alternative trading partners, 97 per cent of Canadian-produced oil was exported to the U.S. in 2023, and in 2024, the U.S. imported nearly 60 per cent of its oil from Canada. Will this change if the U.S. ultimately decides to impose tariffs on Canadian oil?
The fact that the U.S. and Canada have integrated pipeline infrastructures makes it cost-effective to move oil and gas. Though shale exploration in the U.S. has eliminated the need for the U.S. to import oil and has lowered oil imports over the past few years, Canadian oil can not be replaced, part of the reason is that 20-25 per cent of US refineries are equipped to refine Canadian heavy oil.
The U.S. sells WTI light oil produced in the Permian Basin at $74 per barrel, thus earning export revenue, and imports the equivalent amount of Canadian heavy oil, which requires more refining to be used as fuel, at $60 per barrel, as a way to reduce trade deficits with other countries.
From Canada’s perspective, the country has significant oil resources but limited domestic consumption. Although Canada has been exploring new markets through the Trans Mountain Expansion Project, which includes Canadian oil to be supplied to the Westridge Marine Terminal, ultimately transport Canadian oil to Japan, India and Southeast Asia. This may be an opportunity to enter new markets, but it will require significant capital and time and may not be as cost-effective as supplying oil to the United States.
So, for Canada and the US, energy interests are intertwined and difficult to disentangle in the medium term, a fact both sides should know well. Trump has temporarily halted the tariffs, but if a 10 per cent tariff is imposed on Canadian oil at $60 a barrel, the cost of the tariff would be paid by Canadian exporters or US refiners. The other option is to split the tariffs equally.
Therefore, stocks of Canadian energy producers like Cenovus Energy (TSX:CVE) may not provide a safe haven in the event that Trump raises tariffs. The tariffs will partially hurt the profits of Canadian energy merchants in the short term.
If oil prices fall below $60, Canadian energy stocks do not have the cost advantage to maintain higher profits. However, pipeline stocks could be a safe haven because they are not affected by oil prices up and downs.
Scotiabank Global Equity Research expects that if tariffs are imposed, it won’t be for long, as the cost will eventually be passed on to U.S. consumers. If the U.S. chooses to stop importing Canadian oil, 20 per cent of domestic refineries will become a heavy burden.
