Tariff Tantrum: Addressing Questions on Oil & Midstream

• Oil prices have been plagued by demand concerns related to tariffs and recession risk, while OPEC+ surprised markets with higher production plans for May.
• Amid the weakness in oil, midstream/MLPs were more resilient than other energy subsectors given fee-based business models with stable cash flows and less commodity price exposure.
• In a potential recession, midstream would be expected to hold up better than broader energy given midstream’s defensive qualities, including more stable cash flows and healthy yields.

After a strong 1Q25, energy stocks got rocked last week, along with just about everything in the equity market. Midstream/MLPs held up better than other pockets of energy given fee-based business models with stable cash flows and less commodity price exposure. The Alerian MLP Infrastructure Index (AMZI) was down 12.2% from Wednesday’s close through Friday. The Alerian Midstream Energy Select Index (AMEI) was down 12.0%. The broad Energy Select Sector Index (IXE) tumbled 16.0%. Benchmarks for oil and gas producers and oil field service names were down over 20% from Wednesday’s close to Friday.

While acknowledging that the trade situation remains fluid, this note addresses common questions surrounding midstream/MLPs, oil prices, and recessions in light of last week’s tariff announcements.

From Wednesday, April 2, to Friday, April 4, WTI oil prices fell 13.6% to $62 per barrel. Tariffs are widely considered to be negative for global trade and therefore economic growth. That translates to downward pressure on expected oil demand. Fears that trade wars will lead to a recession only add to oil demand concerns.

Meanwhile, on April 3, eight OPEC+ members announced plans to increase output by 411,000 barrels per day (bpd) in May, subject to market conditions. The surprise move represents a production hike 3x the increase of 138,000 bpd for this month. Incremental supply amid a weakening demand outlook has significantly pressured oil prices.

Typically, producers respond to oil price moves with a lag of a few months. To gauge how low prices can go before producers lay down rigs, investors often look at breakeven prices to profitably drill wells. Producers need $65 per barrel (bbl) WTI on average to profitably drill new wells, as shown in the chart below from the Dallas Federal Reserve Bank. To simply cover operating costs for existing wells, producers need $41/bbl on average per the Dallas Fed Survey.

We believe WTI oil prices would have to be sustained below $55/bbl for a matter of weeks for producers to curb activity (versus $62 on the morning of April 7). Incidentally, the U.S. oil rig count on Friday was the highest it’s been since June 2024 per Baker Hughes. Meanwhile, U.S. benchmark natural gas prices are decent, at just below $4 per million British thermal unit.

If the current situation worsens noticeably and producers ultimately decide to curb their output, midstream companies typically have protections built into their contracts to ensure they get fees even if the customer decides not to ship its contracted volumes. These protections include minimum volume commitments and take-or-pay provisions.

As discussed above, tariffs have implications for oil demand and therefore oil prices. Oil has a significant impact on energy sentiment overall. That can weigh on midstream, even though companies are largely providing services for fees.

Energy infrastructure is also impacted by steel tariffs, which could make growth projects more expensive. However, midstream companies can likely pass on higher costs to customers. That could help mitigate any negative impact.

MLPs largely operate assets in the U.S., with small exceptions like Plains’ (PAA) natural gas liquids (NGLs) business in Canada or Sunoco’s (SUN) two terminals in Europe. For broader midstream represented by AMEI, Canadian names accounted for 28.1% of the index by weighting as of March 31. Continued Canadian energy tariffs at 10% are not expected to be a material headwind for midstream. Pipeline assets tend to be highly contracted. And in some cases, refiners have limited supply alternatives. Producers and refiners (and ultimately consumers) are expected to share the incremental costs. On Thursday and Friday, the Canadian names in AMEI actually outperformed their U.S. counterparts (down 6.9% versus U.S. names down 14.0%). Canadian names have historically performed defensively in periods of market volatility.

Assets tend to be largely domestic (or in Canada). But midstream companies play a prominent role in exporting energy, including liquefied natural gas (LNG), crude, and NGLs like ethane and propane. Energy was exempt from the tariffs issued on April 2. If countries respond with tariffs on U.S. hydrocarbons as China did, cargos may shift from countries with tariffs to those without tariffs. According to media reports, Japan and Bangladesh are looking at purchasing more U.S. LNG as part of potential trade deals.

We are not concerned about dividend cuts. Companies are in a stronger financial position today than in 2020. And they generally have more financial flexibility thanks to free cash flow generation and better balance sheets. Equities have arguably been more volatile than midstream’s underlying businesses. As of Friday, AMZI and AMEI were yielding 7.7% and 5.7%, respectively. Midstream companies have been prioritizing dividend growth, and that is expected to continue.

As discussed in a recent note, MLPs tend to perform well as long as distributions are growing (read more). Looking at annual performance since 2007, the Global Financial Crisis in 2008 is the only example of a year in which MLP distributions were growing and the equities were still down significantly.

Recession concerns have gained momentum, and it would be remiss to ignore recession risk. Energy stocks are likely to come under pressure in a recession scenario. But midstream would be expected to hold up better than broader energy given its defensive qualities. These include fee-based business models and more stable cash flows, as well as healthy yields.

The table below shows price performance for the S&P 500 (SPX), IXE, and MLPs using AMZI and the  "Alerian MLP Index":https://www.vettafi.com/indexing/index/amz (AMZ) during the 2001 recession and the 2007-2008 financial crisis. For each recession, performance is shown from the relative peak to the relative trough for the SPX and using the dates of the recession as designated by the National Bureau for Economic Research. (MLPs are used as a proxy for midstream given longer index histories and MLPs’ past dominance of the midstream universe.)

During the 2001 recession, MLPs outperformed the broader market and the energy sector, notching double-digit percentage gains. In the financial crisis, MLPs were pressured but outperformed the IXE and SPX. Keep in mind, MLP performance would be even better on a total-return basis.

AMZI is the underlying index for the Alerian MLP ETF (AMLP) and the ETRACS Alerian MLP Infrastructure Index ETN Series B (MLPB). AMEI is the underlying index for the Alerian Energy Infrastructure ETF (ENFR) and the Alerian Energy Infrastructure Portfolio (ALEFX). AMZ is the underlying index for the JPMCFC Alerian MLP Index ETN (AMJB), the ETRACS Alerian MLP Index ETN Series B (AMUB), and the ETRACS Quarterly Pay 1.5x Leveraged Alerian MLP Index ETN (MLPR).

Charting Annual MLP Distribution Changes & Performance

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