Tariffs and Sanctions: Navigating Downside Risks in the Oil Sector

The oil sector is facing significant headwinds in the form of tariffs and sanctions, which could present downside risks for investors. Morgan Stanley recently highlighted these challenges, emphasizing the need for investors to be aware of the potential impacts and adapt their strategies accordingly. This article explores the risks associated with tariffs and sanctions, their potential impact on oil prices, and how investors can mitigate these risks.



Tariffs and Sanctions: A Double-Edged Sword

Tariffs and sanctions can significantly impact the global oil supply chain, disrupting trade flows, increasing costs, and creating uncertainty. In February 2025, President Trump announced tariffs on Canadian and Mexican oil exports to the US, which could lead to lower US refinery runs and impact refinery margins and capacity utilization (Goldman Sachs, 2025). Additionally, US sanctions on Russian and Iranian oil exports have the potential to disrupt global supply and influence oil prices.



Geopolitical Risks and Oil Prices

Geopolitical risks can significantly impact oil prices, as seen in the temporary surge in prices following US sanctions on Russian oil and gas entities in January 2025. However, the market's well-supplied spare capacity and high expected output by non-OPEC producers can mitigate the fundamental impact of these sanctions (OPEC, 2025). Nevertheless, geopolitical risks can induce a shift in demand towards other OPEC+ countries, affecting global oil supply and demand dynamics.

Mitigating Downside Risks

Investors can mitigate the downside risks associated with tariffs and sanctions in the oil sector by diversifying their portfolios and exploring alternative energy investments. Diversifying across different regions and sectors can reduce exposure to tariff and sanction risks. Additionally, investing in renewable energy, energy storage, and infrastructure can provide more stable returns and lower geopolitical risks.



Conclusion

Tariffs and sanctions present significant downside risks for the oil sector, which investors must be aware of and adapt their strategies accordingly. By understanding the potential impacts of these geopolitical risks on oil prices and profitability, investors can make informed decisions and mitigate risks through diversification and alternative energy investments. As the oil sector navigates these challenges, investors should remain vigilant and prepared to adapt to changing market conditions.