US-China Trade Optimism Fuels a 3% Surge in Oil Prices—Here’s What to Watch Next

The global oil market is bracing for a pivotal shift as trade optimism between the U.S. and China sparks a 3% rally in crude prices. Brent crude futures surged to $62.81 per barrel, while WTI climbed to $59.86, marking the largest gains in months. This rebound, driven by high-stakes negotiations between the world’s top oil consumers, underscores the fragile interplay of geopolitics, supply dynamics, and investor psychology. But how sustainable is this rally, and what risks lie ahead?

Market Reactions to Trade Optimism

The catalyst? A scheduled round of U.S.-China trade talks in Switzerland, where Treasury Secretary Scott Bessent and Chinese Vice Premier He Lifeng aimed to ease tensions after years of tariff wars. While Bessent emphasized "de-escalation" over a full deal, traders bet on reduced trade barriers boosting global demand. Analysts at SEB noted the rally reflected a "psychological reset," with markets pricing in hopes of smoother supply chains and stronger manufacturing activity.

This sentiment is reflected in equity markets as well. The S&P 500 rose 1.8% the week of the talks, with energy stocks leading the charge. reveal a clear correlation between trade optimism and investor risk appetite.

The Demand Side: China’s Role and Risks

China’s economy, the largest oil importer, is central to this story. Despite its Q1 GDP growth of 5.4%, underlying weaknesses persist: manufacturing PMI hit a 16-month low, and exports fell -2.2% year-on-year. Yet, during the May Day holiday, consumer spending surged, hinting at a recovery. Beijing’s Strategic Petroleum Reserve (SPR) replenishment—targeting 50 million barrels in 2025—adds further demand support.

However, the Federal Reserve’s caution looms large. A stronger U.S. dollar, fueled by interest rate uncertainty, could undermine gains by making oil costlier for non-dollar buyers. shows a negative correlation, with oil prices dipping as the dollar strengthens.

Supply Dynamics: OPEC+ vs. Shale Constraints

While trade talks dominate headlines, supply remains a wildcard. OPEC+ plans to add 411,000 barrels per day (bpd) in June threaten to offset demand gains. Yet U.S. shale output faces headwinds: rig counts are projected to drop 10% in Q2, and capital discipline limits growth. Nigeria’s push to boost production to 1.8 million bpd by Q3 2025 adds complexity.

The net effect? A delicate balance. Saudi Arabia’s $0.80 per barrel price hike for Asian buyers signals confidence in demand resilience, but overproduction risks could still cap prices. highlights the supply-side tug-of-war.

The Wildcards: Tariffs, Geopolitics, and Renewables

1. Tariff Risks: Full implementation of U.S. tariffs on Chinese goods could still slash global oil demand by 500,000 bpd. Morgan Stanley’s forecast of a $62.50 terminal Brent price (down from $70) reflects this uncertainty.
2. Geopolitical Tensions: Middle East conflicts, like clashes between Israel and Houthi forces, add a risk premium but have yet to disrupt supply chains.
3. Renewables’ Slow Transition: While the EU struggles to reduce Russian gas reliance (still 15% of imports), oil remains dominant. The Rockefeller Foundation’s coal plant closures highlight long-term trends but won’t dent demand soon.

What to Watch: Near-Term and Long-Term

• Trade Talks Outcome: Success in the Switzerland talks could solidify gains, but skepticism remains. Analysts at Eurasia Group warn Beijing views negotiations as a "distraction" from deeper issues like IP disputes.
• SPR Replenishment: Track China’s SPR activity—50 million barrels could mean an extra 0.5 million bpd demand boost.
• OPEC+ Compliance: Falling compliance to 95% (from 110% in 2024) may accelerate supply growth, pressuring prices.

Conclusion: A Rally Built on Hope, Tested by Reality

The 3% oil price surge reflects a market betting on reduced trade tensions and Chinese demand resilience. But without concrete tariff rollbacks or OPEC+ restraint, this rally risks unraveling. Key data points—such as U.S. gasoline inventories, Chinese manufacturing PMI, and OPEC+ production reports—will guide the next moves.

Investors should remain cautious. While the $60-per-barrel range offers support, the path to sustained gains hinges on more than hope: it requires actionable progress in U.S.-China relations and a disciplined approach to global supply. As history shows, optimism alone rarely lasts—especially when geopolitical and economic storms loom.

reveal volatility is the norm. Stay alert, but don’t bet the ranch on a lasting rally until the deal is done.