Oil Climbs on US-China Trade Optimism: A Fragile Rally Amid Persistent Risks

Global oil prices surged in early 2025 as the first round of US-China trade talks in Geneva sparked optimism about resolving the prolonged tariff war. Brent crude climbed to $64 per barrel by May 9th, a 2.8% weekly gain, while West Texas Intermediate (WTI) hovered near $60, reflecting market hopes that reduced trade tensions could stabilize demand. However, the rally remains fragile, as unresolved structural issues—including tariffs, sanctions, and geopolitical rivalries—threaten to derail progress.

Trade Optimism Fuels Short-Term Gains

The Geneva talks, led by US Treasury Secretary Scott Bessent and China’s Vice Premier He Lifeng, were described as “substantive” and “constructive,” with both sides agreeing to establish a China-US economic consultation mechanism for ongoing dialogue. While specifics on tariff reductions remained undisclosed, US officials hinted at potential cuts, with President Trump suggesting a drop to 80% tariffs from current levels of 145%. This optimism buoyed oil prices, as traders anticipated reduced economic drag from a cooling trade war.

The market’s focus on trade progress is understandable: the $660 billion in goods affected by retaliatory tariffs has already dampened global growth, with oil demand at risk as manufacturing and shipping sectors face headwinds. Analysts at Saxo Markets noted that even a 50% reduction in tariffs could reignite trade flows, potentially lifting oil prices further.

Countervailing Pressures Keep Markets on Edge

Despite the trade-driven rally, multiple risks cloud the outlook:

1. Tariff Volatility: China’s state media emphasized its “core principles” remain non-negotiable, while US negotiators acknowledged “dozens” of rounds may be needed to finalize deals. With Trump’s history of tariff reversals, the path to meaningful reductions is uncertain.

2. OPEC+ Overhang: The cartel’s decision to boost production by 1.5% in 2025 threatens to outweigh demand gains from trade optimism. IndexBox data shows this increase could flood markets, countering price gains from geopolitical tensions.

3. Sanctions and Supply Disruptions:

4. The US targeted China’s Hebei Xinhai Chemical Group and port operators linked to Iranian crude, while the UK announced sanctions on 100 Russian oil tankers. These moves risk fragmenting global supply chains, creating localized shortages and volatility.

5. 

6. Geopolitical Shifts: Russia’s push for Chinese investment in energy projects—such as the Baltic LNG terminal—and Norway’s Arctic exploration plans signal long-term supply shifts that could undermine OPEC’s market dominance.

Analyst Perspectives: Beyond the Trade Narrative

While traders fixate on US-China talks, deeper structural factors loom large:
- Demand Risks: The $1.2 trillion US trade deficit with China remains unresolved, and sanctions-driven agricultural collapses—like a 30% drop in soybean imports—could spill over into energy markets by destabilizing trade-dependent economies.
- Supply-Side Decisions: OPEC’s output policies, not just trade talks, will ultimately determine prices. The MIRAGRODEP model warns that persistent trade conflicts could reroute oilseed trade flows, indirectly weakening demand.

Conclusion: A Delicate Balancing Act

The recent oil rally reflects cautious optimism about US-China trade de-escalation, but sustained gains require more than hope. Key risks—OPEC+ production hikes, sanctions-induced supply disruptions, and the unpredictability of trade negotiations—could reverse momentum quickly.

Crucially, traders must monitor two metrics:
1. Tariff Reduction Progress: A 50% cut in tariffs would signal meaningful de-escalation, potentially boosting oil demand by 0.5–1 million barrels per day.
2. OPEC+ Compliance: If the cartel’s production increases outpace demand recovery, prices could fall back to $50–55 per barrel, even with trade optimism.

For now, the market is betting on a “trade reset” to offset these headwinds. But with geopolitical tensions and structural imbalances lingering, this rally may prove fleeting unless concrete agreements materialize—and soon.

In a nutshell, oil investors face a high-reward, high-risk scenario: optimism is driving prices up, but the path to stability remains fraught with pitfalls.