Geopolitical Risk and Oil Market Volatility: Navigating U.S.-China Trade Tensions in 2025

The global oil market in 2025 is a theater of volatility, driven by the escalating U.S.-China trade tensions and their cascading effects on energy security. On October 14, 2025, crude oil prices plummeted over 2%, hitting a five-month low, as renewed trade disputes collided with the International Energy Agency's (IEA) forecast of a 4 million barrels-per-day surplus in 2026, according to a MarketMinute report. This surplus, fueled by OPEC+ and non-OPEC+ production surges and sluggish demand from macroeconomic headwinds and electric vehicle adoption, has amplified investor anxiety. Meanwhile, U.S. threats of higher tariffs and China's retaliatory sanctions have deepened fears of a global economic slowdown, further destabilizing energy markets, according to BlackRock's Geopolitical Risk Dashboard.

Geopolitical Risk as a Catalyst for Oil Volatility

Geopolitical risk indices are proving critical in predicting oil price swings. A recent study in Energy Economics highlights how the Geopolitical Risk Index (GPR) enhances volatility forecasts when integrated into Dynamic Model Averaging (DMA) frameworks, as noted in KPMG's energy insights. In 2025, U.S.-China strategic competition—ranging from South China Sea militarization to Taiwan-related tensions—has spiked GPR readings, creating asymmetric market responses; for instance, Q2 2025 saw oil prices surge from $69/b to $79/b following Israeli and U.S. strikes on Iran, only to stabilize after a ceasefire. Such events underscore how geopolitical shocks can override fundamental supply-demand imbalances, creating short-term price spikes.

BlackRock's Geopolitical Risk Dashboard ranks U.S.-China trade policy as a top-tier threat, noting that even minor escalations could disrupt shipping lanes and energy infrastructure. This volatility is compounded by the Middle East's instability and cyberattack risks, which further fragment market expectations, a pattern also emphasized in KPMG's energy insights.

Energy Sector Investment Strategies in a Fractured Landscape

Energy sector leaders are recalibrating strategies to mitigate these risks. According to KPMG's 2024 Energy CEO Outlook, 72% of executives are increasing investments in energy transition technologies, such as solar and battery storage, despite ongoing geopolitical turbulence. However, 75% continue to fund fossil fuel projects, reflecting a prolonged transition phase. This dual-track approach is driven by the need to balance energy security with decarbonization goals, particularly as the U.S. and Europe seek to reduce reliance on Chinese renewable energy manufacturing.

Investors are also prioritizing supply chain resilience. Tariff threats and cyber risks have prompted firms to localize production and diversify suppliers. For example, J.P. Morgan analysts note that AI-driven demand surges and control over critical minerals—such as lithium and cobalt—are reshaping energy geopolitics. Companies securing access to these resources are gaining a competitive edge, while those exposed to volatile trade corridors face heightened risk.

Strategic Recommendations for Investors

For energy investors, the path forward requires hedging against both price swings and geopolitical shocks. Diversifying portfolios across energy transition assets and stable fossil fuel projects can buffer against trade-related disruptions. Additionally, leveraging geopolitical risk analytics—such as BlackRock's dashboard—can help anticipate market-moving events.

Long-term success will hinge on adaptability. As KPMG emphasizes, energy leaders must navigate a "prolonged coexistence" of traditional and renewable energy systems while managing supply chain risks. This means investing in technologies that reduce exposure to geopolitical hotspots and aligning with regulatory shifts in both the U.S. and China.

Conclusion

The interplay of U.S.-China trade tensions, geopolitical risk, and oil market volatility is redefining energy investment strategies in 2025. While the IEA's surplus forecast and demand slowdowns create baseline uncertainty, strategic competition between the world's two largest economies remains the dominant wildcard. Investors who integrate geopolitical risk assessments into their decision-making—and prioritize resilience over short-term gains—will be best positioned to navigate this turbulent era.