Oil Prices Climb on Trade Optimism Amid Persistent Risks

The global oil market entered a period of heightened volatility in late April and early May 2025, with prices surging over 1% in the days leading to the U.S.-China trade talks on May 10. Brent crude rose to $64 per barrel, while WTI hit $61.17—a 4% weekly gain—fueled by hopes of reduced tariffs and a thaw in trade tensions between the world’s top two oil consumers. Yet beneath the surface, a mosaic of geopolitical risks, supply-side pressures, and macroeconomic uncertainties underscored the fragility of this optimism.

Trade Talks: A Fragile Catalyst for Optimism

The May 10 meeting between U.S. Treasury Secretary Scott Bessent and China’s Vice Premier He Lifeng held out the promise of tariff reductions. U.S. President Donald Trump’s suggestion to lower tariffs from 145% to 80%—while still punitive—eased fears of a deepening recession. Analysts at Morgan Stanley and the Economist Intelligence Unit projected further de-escalation, with effective U.S. tariffs potentially dropping to 45% by year-end. China’s April export growth and narrowing import declines added to the positive sentiment, as investors bet on a rebound in global demand.

However, the talks were no panacea. China demanded total U.S. tariff removal, while Washington sought concessions on technology transfers and critical minerals like gallium and rare earths. The stalemate highlighted the limits of progress, with neither side willing to surrender core interests.

Geopolitical Crosscurrents: Sanctions and Supply Risks

Even as trade optimism buoyed prices, geopolitical tensions complicated the outlook. The U.S. imposed sanctions on China’s Hebei Xinhai Chemical Group and three Shandong port operators for facilitating Iranian oil purchases, underscoring the fragility of supply chains. Meanwhile, the U.K.’s sanctions on 100 Russian tankers—part of Putin’s “shadow fleet”—added to regional instability.

On the supply side, OPEC+ remained a wildcard. The group’s May-June production hikes totaled 411,000 barrels per day (bpd), though unplanned outages in Libya, Venezuela, and Iraq limited actual output growth. In the U.S., Texas drilling activity hit its lowest since February 2025, with permit applications down 30% month-over-month—a sign of tightening domestic supply.

Demand Dynamics: Jet Fuel and Economic Uncertainty

Demand factors provided a mixed picture. U.S. jet fuel demand hit pre-pandemic levels, reaching 2 million barrels per day in late April—a 474,000 b/d weekly spike—bolstering prices. Yet broader economic headwinds loomed. The U.S. GDP contraction in early 2025 and China’s sub-target growth (4% vs. 5%) cast doubt on the durability of demand recovery.

Market Sentiment: A Delicate Balancing Act

Analysts emphasized that gains were “tempered by lingering uncertainty.” Alex Hodes of StoneX noted that while tariff reductions offered hope, “the math” of shifting from 145% to 80% remained fragile. Middle East tensions—such as Israel’s interception of a Yemeni missile—also supported prices, though OPEC+’s output plans capped upward momentum.

Conclusion: A Volatile Path Forward

The May 10 trade talks marked a pivotal, albeit limited, step toward de-escalation. Oil prices climbed as investors bet on reduced tariffs and stronger demand, but the market remains hostage to a precarious equilibrium.

• Supply-Side Pressures: OPEC+’s production hikes and U.S. drilling declines create a tug-of-war. The EIA reported that actual OPEC output dipped in April due to outages, but further increases could weigh on prices.
• Trade Risks: Even with tariff reductions, China’s control over critical minerals and the U.S. reliance on its $800 billion holdings of Treasuries amplify geopolitical stakes. A full deal remains elusive.
• Economic Outlook: The STEO’s 2025 Brent price forecast of $68/b faces upward pressure from geopolitical risks but downward drag from slowing demand. The May 10 closing price of $60.07/b—below the forecast—hints at skepticism about demand resilience.

In the coming months, oil markets will oscillate between trade optimism and supply-demand realities. Investors must monitor tariff negotiations, OPEC+ compliance, and macroeconomic data closely. As Nikos Tzabouras of Tradu observed, “The math of trade de-escalation is real, but the risks of miscalculation are vast.” For now, the oil market’s ascent remains a fragile climb on a slippery slope.