The Art of the Oil & Gas Deal

The Gist: The President wants to lower oil prices in order to help finance tax cuts but the bond market doesn’t appear to be cooperating and neither do E&P shareholders.

The President wants lower oil prices while many in the industry need higher prices in order to thrive.

However, in my view, the two sides also have their material constraints.

To the administration, the material constraint is the bond market. Higher rates on the long end of the curve will not allow him to push through his fiscal agenda of not only extending the TCJA but also of providing new tax cuts across corporates, social security, individuals, etc.

The Fed is on hold for now, so the tools through which President Trump and Treasury Secretary Bessent are using in an attempt to lower the 10Y are DOGE and the oil markets via the latter’s relationship with long dated inflation expectations as evidenced below.

As the chart shows, the bond market does not appear to be cooperating with the President’s agenda.

In classic negotiating tactics, the administration has beaten up on the price of oil (possibly with a little help from OPEC?) and this week is meeting with oil execs to discuss a wide range of energy policies, one of which will most likely be to increase production in order to drive prices lower to their stated goal of $50/bbl.

However, the industry has its own constraints.

Compensation structures are set by the board of directors which in turn follow the direction of shareholders.

A decade ago, investors demanded E&Ps focus less on growth for the sake of growth and more on creating value. This is evidenced in the chart below.