Energy Sector Braces for Impact from Tariffs

Stunned by President Donald Trump’s executive orders on tariffs in early April, the oil and gas industry watched carefully and initiated something of a pause of its own as commodity and equity markets gyrated, nervous lenders pulled back and the M&A engine sputtered.

Deciding on a strategy for moving forward requires having a reasonable idea of what will happen next, and on that point, decision makers were in the dark.

“The administration doesn’t know, nobody in my business knows, no economist knows. You have to make a lot of different conjectures about what the administration is going to do,” Stephen Trauber, managing director of Moelis & Co., told Oil and Gas Investor. “And the one thing we know is that this administration is very erratic and changes in a heartbeat.

“For us to be able to not only know exactly what they’re going to do, how long it’s going to take, what the reaction from others will be, and then therefore what the impact on our U.S. economy and what the global economy will be is just too uncertain to know.”

But uncertainty, while not exactly a friend, has very much been a constant companion throughout the history of this cyclical industry that pokes holes in the ground and hopes to find fossil fuel treasure.

Over the long term, the world has needed access to greater volumes of affordable energy, which the oil and gas industry has reliably delivered. For that reason, it has and will endure. Over the short term, however, the industry faces significant challenges.

Shaken oil markets

When the tariffs were announced, oil prices tumbled, assisted by what Trauber termed OPEC’s “pump for Trump” policy of removing reduced production quotas earlier than anticipated.

“With an uncertain economy, with the looming trade wars and with OPEC’s decision to go ahead and increase their production, then I think that one would have to think that oil prices are going to be weaker,” he said.

Between April 2 and April 7, WTI prices dropped 15% to $61/bbl—a four-year low. Publicly traded oil and gas companies also took a beating. Between April 2 and April 16, the XOP index for oil and gas companies was down 20%. Diamondback Energy, Occidental Petroleum and Chevron shares each shed roughly one-fifth of their value.

At an industry conference on April 15, soon-to-be Diamondback CEO Kaes Van’t Hof said oil markets are “now probably set for a period of weakness, probably more weakness than where we are today.”

Based on conversations with other operators, “there’s going to be a significant contraction in U.S. activity and production even if we hold $60,” Van’t Hof said.

A $50/bbl to $55/bbl range would yield “a really tough situation for U.S. production,” he said. In early April, the U.S. Energy Information Administration predicted WTI would average $63.88/bbl in 2025 and $57.48 in 2026.

An oil price decline will shrink investment, Trauber said.

“This will only exacerbate the issue of not being able to replace our produced oil and creating less oil on a global basis,” he said. “The way supply and demand works, as you produce less, prices tighten, prices rise and you get back to producing more. So again, we have to let the market settle out. We’ve got to see the impacts of supply and demand, and then we’ve got to see reinvestment occur as prices start to increase again.”

Short-term pain

After the tariffs went into effect, they had an immediate impact on LNG, one of the pillars of the president’s energy dominance agenda. The typical price for liquefication jumped from about $2.50/MMBtu to about $2.70/MMBtu, according to Sergio Chapa, senior LNG analyst for the Americas at Poten and Partners.

“The new, new normal is around $2.70 or even higher for shorter-term projects, and why is that? Because the inputs are higher—steel, aluminum, turbines, compressors,” Chapa said during a webinar in mid-April. “Even though some of this equipment is made by American companies, they’re made overseas, and their tariffs are due at the time of importation.”

Construction costs of ongoing LNG projects, which rely on raw materials from China, could continue to rise and affect some of the long-term plans for the buildout along the Gulf Coast. Reports surfaced of steel price increases of 25% even before the tariffs went into effect.

“There are several pre-FID (final investment decision) projects here in the U.S., and a lot of them are going to have to renegotiate their EPC (engineering, procurement and construction) contracts with builders,” Chapa said. “One thing we’re also hearing about in the market is that EPC contract validity, the amount of time that a contract’s good for, is getting shorter and shorter.”

Near-term troubles should not be considered a surprise, Trauber said. Tariffs typically result in a slowdown in the global economy, which can cut into oil prices as they alter short-term supply and demand fundamentals.

“Slower demand, slower GDP, means lower demand for oil, which means oil prices will come under some pressure without some cuts in oil. So, we’re starting to see that kind of [event] in the marketplace,” he said.

“Oil prices have declined 10% since the tariffs, 20% since [Trump] took office.”

The Federal Reserve reaffirmed that tariffs will probably spur inflation and slow growth, the president of the Federal Reserve Bank of New York, John C. Williams, told Fox Business News in mid-April. Williams suggested that the administration consider the risks of inflation and rising joblessness in crafting policy.

The ultimate goal is for tariffs to create a more level playing field for global trade, bring manufacturing jobs back to the U.S. and create a very strong domestic economy, Trauber said.

“That’s the hope for the longer-term impact here,” he said. “So, I would say that the outlook is still good.”

M&A: Bye-bye to buy-buy?

Gauging the tariff trauma’s impact on M&A is not easy. Jeff Nichols, chairman of energy practice group at Haynes Boone, said that in boom times and difficult stretches M&A usually continues.

In either scenario, deals could pick up whether oil prices drop or improve. The problem is that the oil strip, in particular, is a mess.

“Now the price is jumping all over the place and there’s so many factors going into it, concerns about the economy, all the international players and public policy, that it’s just hard to know where this is headed,” said Marc Graham, managing director and head of energy at Texas Capital Bank.

When prices fluctuate so much, M&A pauses for a while.

In the long run, “everybody remains optimistic and very bullish on oil and gas, and that’s a huge change from a year ago,” he said.

But short term, it’s hard to price a deal when the price of oil goes from $70 to $95 down to $50 in just a few months because the pricing is important for hedging for financing, Graham said.

“It’s important to price reserves when you’re doing an M&A deal. So, when it comes to transactions, there’s a big bid-ask spread between buyers and sellers, which needs to narrow based on a consensus of the future,” he said.

Trauber was more confident in M&A continuing, though gassy deals are more advantaged because there’s been less turbulence in prices.

“We’re very busy. We’ve got a lot of transactions we’re working on both with buyers and with sellers, some of which has been reported, some of which have not been reported,” he said. “And thus far, people are continuing on with their processes.”

Trauber said he wouldn’t be surprised to see oil deals face more challenges to get done and “sellers who had hoped to be able to market and monetize oil assets aren’t getting the valuations that they hoped for when they started the processes.”

Analysts’ assessments were far more tepid.

Truist analyst Neal Dingmann said M&A will be limited. Activity has likely taken a pause as buyers and sellers try to determine what the landscape will look like for at least the remainder of the year, Dingmann wrote in a mid-April commentary.

“However, there is potential for some smaller deals to transact along with various possible natural gas sales… We also assume various non-operated deals could transact as holders elect not to participate in various [authorizations for expenditure], instead deciding to cash out on various assets.”

It’s probably too early, though, to see any type of distressed sales with several more weeks of much lower prices likely needed before these type of deals are announced, Dingmann said.

David Deckelbaum, managing director at TD Cowen, wrote in mid-April that consolidation was already losing steam. E&P deal flow had been on a downward trend since 2017 before increasing 13% year-over-year in 2024.

So far in 2025, deals are tracking roughly 60% lower on the heels of unstable capital markets and volatile commodity moves “following tariff/OPEC+ announcements.” Texas Capital Bank’s Graham also said he sees a pause on consolidation.

“We were working on a large number of deals with large numbers, but as we were working on these deals, commodity prices start moving,” Graham said. “Sellers don’t want to sell. They want to see where things land and deals [may] come off the market. And I thought those would’ve returned. But now in the current commodity price environment, I’m certain they will not.”