Strategic Approaches for Oil & Gas Investors in a Trade War-Impacted Market

• Investors can expect continued oil price volatility with Brent crude hovering around $61 per barrel as the U.S.- China tariff war creates demand destruction fears, potentially driving prices further down to Goldman Sachs' projected $62 and $58 per barrel for Brent and WTI by December 2025.
• The redirection of U.S. LNG cargoes away from China to European and other Asian markets will create structural shifts in global gas flows, benefiting companies with flexible sales arrangements and strengthening Middle Eastern and Asia-Pacific producers securing long-term Chinese supply contracts.
• Gulf Cooperation Council countries may weather the tariff storm better due to their warm relations with the Trump administration and financial strength, though their budgets remain vulnerable with Saudi Arabia requiring oil prices above $90 per barrel compared to current prices in the low $60s.
• Companies employing effective hedging strategies and those diversifying geographically will demonstrate greater resilience during market turbulence.
• Infrastructure control will be a key differentiator for oil and gas companies where processing facility ownership enables access to premium LNG pricings.

The global oil market is experiencing significant volatility as the escalating trade war between the United States and China sends ripples through commodity markets. Oil prices have tumbled to their lowest levels since February 2021, with Brent crude dropping below $61 per barrel and West Texas Intermediate (WTI) falling below $58. This market correction, triggered by President Donald Trump's implementation of sweeping tariffs, presents both challenges and opportunities for energy investors navigating an increasingly complex geopolitical landscape.

Ye Lin, VP of Oil Commodity Markets at Rystad Energy, highlights the market's growing concerns about demand destruction:

"China's aggressive retaliation diminishes the chances of a quick deal between the world's two biggest economies, triggering mounting fears of economic recession across the globe."

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The current oil price environment reflects a complex interplay of supply and demand factors, complicated by geopolitical tensions. Goldman Sachs has revised its oil price forecast downward, projecting that Brent and WTI could fall to $62 and $58 per barrel, respectively, by December 2025, and to $55 and $51 by December 2026.

This precipitous drop has occurred despite OPEC+ announcing plans to increase production, a move that analysts now suggest may be reconsidered given current price levels. This strategy echoes the 2014 price war between OPEC and shale producers, which significantly restructured the market dynamics. As Ashley Kelty, analyst at Panmure Liberum, notes:

"Analysts suggested that the White House wants to drive oil prices closer to $50 as the administration believes that the U.S. oil and gas industry can survive a period of disruption."

The downward pressure on prices has been exacerbated by OPEC+'s recent decision to increase output in May by 411,000 barrels per day, a move that analysts now believe could push the market into surplus territory. This supply increase, coupled with diminishing demand projections due to trade tensions, has created a perfect storm for price suppression.

LNG Redirection

The escalation of U.S.- China trade tensions has severely disrupted the LNG market, with Chinese buyers completely halting imports of U.S. LNG due to tariffs and now actively reselling their contracted cargoes to European and other Asian markets. This 60-day import gap represents the longest such period since Trump's first term trade war, indicating a significant structural shift in global gas flows.

For oil and gas investors, this development carries mixed implications: while creating immediate challenges for U.S. LNG exporters who must redirect volumes and potentially accept lower margins, it simultaneously strengthens the position of Middle Eastern and Asia-Pacific producers who are now securing long-term Chinese supply contracts.

The redirection of cargoes is inadvertently benefiting European markets by increasing available supply for storage refill ahead of winter, potentially pressuring prices in that region. This trade-driven reshuffling highlights the importance of geographic diversification in energy portfolios and reinforces the investment thesis for companies with flexible sales arrangements and strong positions in markets less affected by U.S.-China trade friction.

Regional Impacts: Gulf States and Beyond

While the global oil market faces headwinds, different regions are positioned to weather the storm with varying degrees of resilience. The Gulf Cooperation Council (GCC) countries—Saudi Arabia, the United Arab Emirates, Bahrain, Kuwait, Oman, and Qatar—which hold approximately 32.6% of the world's proven crude oil reserves, are facing both opportunities and challenges.

Ben Powell, BlackRock's chief investment strategist for Asia-Pacific and the Middle East, suggests that the GCC's warm relations with the Trump administration and their financial strength provide some insulation from the worst effects of the tariff war. In a discussion with CNBC, Powell stated:

"I do think the Middle East, with the deep relationship with the U.S. that they have, should come out okay."

However, the lower oil price environment presents significant budgetary challenges for these oil-dependent economies. Saudi Arabia, for instance, requires oil prices above $90 per barrel to balance its budget, according to International Monetary Fund estimates. With current prices in the low $60s, the kingdom's ambitious Vision 2030 diversification plans, which ironically depend heavily on oil revenues, may face funding constraints.

Monica Malik, Chief Economist at Abu Dhabi Commercial Bank, warns about the fiscal implications:

"The GCC should be in a relatively favourable position to withstand headwinds, especially the UAE. [....] Our greatest concern would be a sharp and sustained oil price fall, which would require a reassessment of spending plans—government and off budget—including capex, while also potentially affecting banking sector liquidity and wider confidence."

Corporate Strategies

Hedging and Diversification

In response to market volatility, oil and gas companies are employing various strategies to protect cash flows and enhance resilience. Hedging has emerged as a critical tool for managing price risk, as evidenced by Horizon Oil's recent announcement.

Horizon Oil disclosed that it has progressively put in place oil hedging volumes over recent months to mitigate the impact of oil price volatility on corporate cashflows. The company has secured 180,000 barrels of dated Brent swaps at a weighted average price of approximately $71 per barrel, significantly above current market prices, providing a buffer against further price declines.

Beyond hedging, companies are also pursuing strategic diversification to reduce dependency on single markets or products. Genel Energy, for example, announced its entry into Oman's oil sector, describing this move as an important first step towards strategic diversification of our business. The company is shifting from cash outflow in 2023 to cash generation in 2024, demonstrating the value of strategic pivots in challenging market conditions.

Paul Weir, Chief Executive of Genel, emphasized this approach:

"For new assets, we will seek both to increase that footprint in Oman, and also acquire assets in other preferred jurisdictions that we have identified as attractive to Genel, with a focus on adding production assets that increase the cash generation and resilience of the business, and provide potential for further growth."

Infrastructure Advantages

Elixir Energy has successfully completed a strategic farmout agreement for its Diona Sub-Block of ATP 2077 in Queensland, Australia, positioning itself advantageously despite the current bearish oil and gas price environment driven by U.S.-China trade tensions. Xstate will acquire a 51% interest in the Diona Sub-Block while Elixir retains a significant 49% stake and maintains 100% ownership of the Taroom Trough blocks A and B.

This arrangement provides Elixir with fully-funded exposure to the Diona-1 exploration well, which offers benefits from being located directly beneath the Waggamba Gas Export Pipeline. The well's proximity to existing infrastructure is particularly valuable during a period when capital efficiency is crucial.

As Elixir prepares for drilling operations planned for Q3 with all permitting in place, the company demonstrates how smaller energy players can navigate challenging market conditions through strategic partnerships, infrastructure-focused development, and disciplined capital allocation.

The case of Trinidad & Tobago's natural gas sector offers additional valuable insights into how infrastructure control can provide competitive advantages in volatile markets. Touchstone Exploration, the largest on-shore oil & gas producer in Trinidad, natural gas development follows a three-stage approach: securing land positions, controlling infrastructure, and implementing targeted drilling programs.

The control of processing infrastructure, in particular, creates significant pricing advantages. As noted by Touchstone Exploration's President & CEO Paul Baay:

"What really changes with the Shell deal is it allows us to go to the LNG market, and we'll get LNG pricing for that gas. To give you a magnitude, we're getting $2.50 right now, and LNG is selling for $12 or $14."

This price differential highlights how strategic infrastructure investments can dramatically enhance revenue potential without requiring proportional increases in production.

Next Phase Value Creation

• Gulf Keystone, operating in Iraq's Kurdistan region, has maintained production despite geopolitical challenges. In 2024, the company reported an average production of 40,689 bopd and targets 46,400 bopd for 2025. Two priorities to create shareholder value focusing on maximizing shareholder value from local sales while working to unlock exports restart and potential upside as local sales demand enabled their consisent strong production.

• Africa Oil strategic focus on Nigerian offshore assets provides stability despite market volatility. Five cargos are scheduled for lifting in Q1 2025, unwinding a significant underlift caused by deferrals from Q4’24 to Q1’25. FY 2024 entitlement production reached 19,400 boepd and the company's 2025 focus is on infill drilling and development progression in its Nigeria operations.

• Beach Energy has completed several major projects in Australia, including the Otway Basin drilling program and Moomba Carbon Capture and Storage project. Strong Otway production and Waitsia LNG swap cargoes underpin 37% earnings growth vs. H1 2024. Results also showed Moomba's carbon capture and storage project capacity can inject up to 1.7 Mt (gross) of CO2 annually demonstrating their dual focus on production and emissions reduction amid price pressures. With a sales revenue of $990 million in 2024, Beach Energy continues development such as Waitsia commissioning and further LNG swap cargoes.

Investor Implications: Navigating the Volatility

For investors in the oil and gas sector, the current environment demands careful analysis of company-specific attributes that enhance resilience. Companies with strong balance sheets, diversified asset portfolios, effective hedging strategies, and infrastructure advantages are better positioned to weather the storm.

The pricing differential between domestic and international markets, as highlighted in the Trinidad case study, underscores the importance of market access. Companies that can pivot between markets or secure premium pricing through infrastructure control may offer superior returns even in challenging price environments.

Additionally, cost structure remains a critical factor. U.S. shale producers, many of which have significantly reduced breakeven prices in recent years, face a serious test of their resilience if prices approach the $50 level that some analysts suggest is the administration's target. As the tariff war continues to evolve, with potential for either escalation or resolution, oil and gas investors should maintain flexibility in their approach, focusing on companies with demonstrated adaptability and financial discipline rather than those dependent on specific price assumptions.