Oil Prices Hesitate at Crossroads of Trade Hope and Geopolitical Risk

The recent surge in Brent and WTI crude prices—a fleeting climb to $62.81 and $59.91 per barrel, respectively—has been a rollercoaster ride for traders. Optimism over thawing U.S.-China trade tensions briefly lifted prices in early May, only for geopolitical risks, OPEC+ supply decisions, and a strengthening dollar to rein them in. This volatility underscores the precarious balance between hope for a resolution to the world’s largest trade conflict and the stubborn realities of sluggish demand and rising geopolitical friction.

Trade Talks and Tariff Dynamics: A Fragile Foundation

The U.S.-China negotiations in Switzerland highlighted both the potential and the limitations of progress. While U.S. Treasury Secretary Scott Bessent and Chinese officials discussed tariff reductions, the sticking points remain monumental. China’s demand to exclude ethane—a critical chemical feedstock—from punitive tariffs—was met with resistance, forcing buyers to pay a $70/mt premium for alternatives. The Trump administration, meanwhile, refused to budge on existing levies, including 145% tariffs on Chinese goods.

Analysts at Citi Research noted that even a “partial victory”—such as sectoral exemptions—could provide a 5–10% price boost. But the reality is grimmer: China’s revised GDP growth forecast of 3.7% and oil demand growth of just 78,000 barrels per day (bpd)—a third of earlier estimates—suggest that trade optimism may be outpacing actual fundamentals.

Geopolitical Crosscurrents: Sanctions and Strategic Tensions

If trade talks were the oil market’s “up” button, geopolitical risks pressed the “down” one. The U.S. sanctioned Hebei Xinhai Chemical Group, a major Chinese “teapot” refinery, and entities linked to Iranian crude shipments, while the UK targeted Russian oil-related entities. These moves, combined with simmering India-Pakistan tensions, injected fear into an already fragile market.

Federal Reserve Chair Jerome Powell’s caution about trade war risks also fueled a stronger U.S. dollar, which hit 99.300 on May 8—the highest since mid-2023. A stronger greenback makes dollar-denominated oil costlier for other nations, dampening demand and trimming prices by roughly $1/barrel in May.

Oil Market Fundamentals: Supply Overhang and Demand Underwhelm

OPEC+ added to the headwinds by announcing a 411,000 bpd production hike for June. This decision, aimed at stabilizing prices, instead undercut bullish trade optimism. Meanwhile, U.S. gasoline inventories—already at multi-year lows—provided little relief, as refinery utilization rates hit 93%, straining supplies during peak summer driving season.

The market’s short-covering rally—where algorithmic traders unwound bearish bets—briefly pushed WTI to $61/barrel. But this proved fleeting. As one trader noted, “The market is caught between hope for a deal and the reality that China’s oil demand growth has halved.”

Analyst Outlooks: Range-Bound Until Proven Otherwise

Citi Research’s downgrade of its three-month Brent forecast to $55/barrel (from $60) reflects this uncertainty. A comprehensive U.S.-China trade deal could still push prices to $65+, but the path to one remains littered with political and economic obstacles. Meanwhile, a potential U.S.-Iran nuclear deal—which could unleash 1 million bpd of Iranian crude—threatens to send prices as low as $50. Conversely, a stalemate might drive prices above $70.

Conclusion: Fragile Optimism, Fickle Markets

The oil market’s fate now hinges on whether U.S.-China trade talks can deliver more than symbolic progress. While short-covering and improved gasoline demand data have provided fleeting support, the numbers tell a cautionary tale: China’s revised GDP and oil demand forecasts, OPEC+ supply hikes, and a strong dollar are all conspiring to keep prices range-bound between $58–$62/barrel.

A durable rally will require concrete tariff reductions, a nuclear deal with Iran, or a meaningful pickup in global demand—none of which are assured. As Citi’s analysts warned, “Prices are captive to headline risk. Without a breakthrough, volatility will remain the norm.” Traders would do well to remember that even in the best-case scenario, the road to $70 is lined with geopolitical potholes.

For now, the market remains stuck at the crossroads—half in hope, half in doubt.