Energy Prospectus

Comments from HFI Research:

I was reluctant to write anything tariff-related at the start of this week because I wanted to see how this drama unfolded, and I'm glad I did.

Overnight, it became evident that the US and China wouldn't give in, but that left open the question of the ridiculous mathematical formula for reciprocal tariffs on the rest of the world.

Thankfully, cooler heads prevailed. President Trump announced via a post today that he has increased tariffs on China to 125% while imposing a 90-day pause on reciprocal tariffs on the rest of the world (with a minimum of 10% being imposed). < My take is that most countries will drop their tariffs against the U.S. and end up with just the minimum 10% tariffs. Canadian oil & gas will be exempt from all tariffs.

As of this writing, everything is massively higher because of the relief that the tariff war is over... for now.

The only certainities amidst the uncertainties
"The Battle of the Cabinet"

But even with the 90-day pause, this tariff saga is far from over. There is a deep fundamental misunderstanding from the Trump administration with regard to trade imbalance and tariffs.

Both Navarro and Lutnick seem to be incapable of understanding just how exactly tariffs work and are instead proposing them as a long-term solution to US trade imbalances. While Bessent and Musk appear to be urging Trump to use tariffs as a form of negotiation tool rather than a weapon.

There are three certainities out of what I've seen in the last week:

Either Navarro and Lutnick are both fired, and we can rest assured that a more diplomatic trade negotiation approach is pursued.

Or Musk and Bessent are out, which pretext even more chaos ahead. < I don't see Trump getting rid of these two.

The last option is for Congress to take away the tariff-mandating power of the President. This is going to be an arduous task and one that will take months.

If Navarro and Lutnick end up winning the "battle of the cabinet", then you should expect full-blown chaos for financial markets for the coming years. But if logic prevails, as it usually does, then Bessent and Musk will win, which will imply a calmer environment going forward.

The best case scenario is for Congress to do its job and take away the tariff-mandating power. In my view, this will gain more traction over the coming months.

US shale will decline

The second certainty amidst all of this nonsense is that US shale oil producers will reduce capex in the near term. The current whipsaw we are seeing in the oil market will imply meaningfully lower US crude oil production going forward.

Using the latest real-time US crude oil production data, we are seeing an average close to ~13 million b/d, with this week's production coming in at ~12.5 million b/d.

With WTI trading around $63/bbl, we will not see US oil producers shut-in production, but we will certainly see delays in drilling and completion. This has the impact of allowing base production to decline (natural base decline), which is sizable.

We estimate that US crude oil production would decline ~225k b/d per month if producers throttle completion activities. At $60/bbl WTI, US crude oil production will average ~12.7 million b/d in Q2 2025 vs the consensus estimate for ~13.65 million b/d.

The -950k b/d delta will contribute meaningfully to global oil market balances. < If this plays out, the global oil market will be very tight heading into 2026

What about Iran?

HFI Research is naive to think that Navarro and Lutnick will be fired.The bulk of the issues are not the tariff rates but the non- tariff barriers. Even Bessent alluded to that today in his news conference today. It’s something that Lighthizer harped on for half his interview with Tucker Carlson. There are numerous trade restrictions that don’t involve a tariff rates and are used to protect domestic industries of the exporting country and can be more restricting for international trade than tariffs. Import quotas, licensing requirements,product quality standards, embargoes, technical barriers to trade, currency manipulation, customs delays,subsidies,price controls,export restraint arrangements,countervailing duties.
If you think a 10% tariff will ameliorate all those non-tariff barriers, I got a bridge to sell you in Shanghai. We need balanced trade which is why Navarro and Lutnick are going nowhere.

Trump seems to have pulled together a massive coalition of allies waiting in line to make a deal while isolating China who is looking like a bloated rat trapped in a corner. He has played his hand to perfection. Of course it is too early to declare success but I am all in behind Trump. He has managed to isolate China which is something I believe everyone wanted but didn’t have the balls to attempt. The days of China having their way by bribing the Biden Crime Syndicate are now officially over. Well done Mr President.

President Trump has done enormous damage to the US economy
Not all is well. The damage President Trump has done to the US economy over the last week was enormous. President Trump damaged consumer and investor confidence, as well as international trust in US treasury bonds.

Import tariffs and trade wars
Although import tariffs have been delayed by ninety days, president Trump did not take tariffs from the table.
President Trump has increased the intensity of trade war with China. US import tariffs sit now at a completely unrealistic 125% and China responded so far with 84% of their own import tariffs and a ban on the export of rare earth metals.

Consumer and investor confidence leads to a lower GDP
The start of the tariffs and the start of the trade wars has severely shaken consumer and investor confidence. The continued threat of tariffs and the increasing intensity of the trade war with China continues to further undermine this confidence. Confusion and uncertainty on tariffs are running galore. Tariffs delay may bring some relief to financial markets but does not restore consumer and investor confidence.

Consumers will react by increasing their savings, which will lead to less consumption, less production and a lower GDP. A lower GDP will lead to a lower tax income.

High uncertainty and the forecasted lower demand will result in investors reducing their investment plans for extra capacity, new plants, etc. This will also lead to a lower GDP.

Container bookings for US exports, have fallen with 18%. With export running at 10.7% of the GDP, assuming the fall in containers continues, this can lead to a fall of 18%*10.7 = 2% in the GDP.

The 2024 US GDP was $ 28.5 T. If there would be a 2-3% GDP reduction than this equates to $ 0.57-0.87 T In 2024 the federal revenue was equal to 17% of the GDP. A reduction in GDP thus could lead to 17%* 0.57-0.87= $ 0.10-0.13 T reduction in government revenue or $ 2,700-3.800 per head of the US population.
A fall in GDP means that tax rates will need to be increased or expenditure needs to be reduced.

International confidence in US treasury bonds leads to more interest payments
The US has had a negative trade deficit for most of the last 60 years. Simply said - the US government has spent more than it received. The US has also run a budget deficit for most of the last 60 years. Simply said - the US government spend more than that it received.

Compared to the rest of world, the US in the sixties was the richest nation on the planet. US citizens could afford to buy products produced inside and outside the US. The US money outflow from the trade deficit was partially compensated by a money inflow from abroad through buying government treasury bonds ($ 7.9 T). The rest of the US money outflow was used as the world reserves currency as the US dollar was seen as a stable save heaven.

Over the last week, despite falling share prices, the yield on the US 10-year treasury bonds has picked up from 4.0% (4th April) to 4.4% (10th April). This is seen as a sign of a falling confidence in the US administration and the health of the US economy and this in treasury bonds.

The 0.4% interest increase, applied to the $ 10 T bonds to be renewed in the near future would require 0.4%*10 = $ 40 B per year extra interest payments or $ 120 per head of the US population.
The average interest rate in 2024 paid on treasuries was only 3.32%. Total debt is $ 37 T, meaning that over time higher increases (a factor 10) are possible.

Conclusions
Trump has damaged consumer and investor confidence, as well as international trust in US treasury bonds. This will cost the US dearly. It is critical that confidence is restored as much as possible, as soon as possible.

Essential will (1) the de-escalation of the trade war with China, (2) reinstatement of approval of the trade policy and import tariff settings authorization back from the president to congress and (3) proof that the US can bring negotiations on trade deals to a close.

Above is my amateur macro economist take on things. I am sure that better experts exist. They sadly are not advising the current administration.

”Trade wars have no winners, only losers”.

Trump inherited an economy that was in dire shape. The Obiden adminstration couldn't send $billions out the door fast enough before 1/20. Yellen financed the massive government debt with short term T Bills. Bessent is faced with refinancing $8 trillion of debt this year, a majority of which is T Bills. Obiden sold out to the Chinese, the Iranians, and NATO. He sent $100's of billions to Ukraine and asked for no receipts. He sent 100's of thousands of young Ukrainians to their certain deaths. Never thought twice about the massive sacrifice of lives and treasure to feed the 10% for the the Big Guy and 50%+/- for his friends and his organized crime party.

Trump may be unconventional but he has assembled a team of highly experienced and skilled leaders to navigate these treacherous waters. The world economy is overlevered and in my opinion the massive stock market fall was just a gasoline tank waiting for someone to light a match. The massive government spending of our grandchildren's future inflated the value of assets of the top 10% and much of it in the Mag 7. The other 90% are barely getting by and recent data indicates they are maxed out on credit.

Yes Trump shook the confidence of the elite owning the Mag 7 and other financial assets in the market. In my view, we were headed for the edge of the cliff. I can only imagine where we would end up if Kamala had been elected. Under our current political system, Trump is on a short fuse to accomplish his objectives before next year's midterms. He is hampered by athin GOP margin thatis full of stray cats, a no- plan liberal party that is throwing the judicial system and lying thru their teeth about his policies in the media that hopefully no ignoranouses are watching.

Trump is a once in a lifetime opportunity guy that can hopefully turn this ship and I am praying for his success. the Fourth Turning is upon us and right now he is our best bet to come out on the right side.