Oil Prices Inch Up 1% as US-China Trade Talks Ignite Optimism—But Risks Linger

The global oil market experienced a modest rebound in May 2025, with Brent crude prices climbing 1% to briefly touch $63.07 per barrel, driven by cautious optimism around U.S.-China trade talks. While diplomatic signals of de-escalation fueled hopes of a demand revival, traders remain acutely aware of countervailing risks—from OPEC+ production decisions to geopolitical tensions. This article explores the interplay of these factors and their implications for investors.

Trade Talks: A Fragile Catalyst for Optimism

High-level discussions between U.S. Treasury Secretary Scott Bessent and Chinese Vice Premier He Lifeng in early May sparked a 1.5% surge in Brent prices. Analysts noted that even incremental progress—such as commitments to “de-escalate” tensions—triggered buying in oil markets. Traders speculated that reduced trade barriers could boost global demand, particularly in manufacturing and transportation. However, Bessent’s emphasis on “fair trade” rather than a full reset tempered expectations. China’s commerce ministry framed the talks as a “necessary first step,” underscoring the lack of immediate breakthroughs.

Bearish Countervailing Forces

Despite the trade-driven rally, several factors kept prices anchored near $61–$63 per barrel:
1. OPEC+ Output Increases: The alliance’s June decision to boost production by 411,000 barrels per day (bpd) threatened to exacerbate oversupply. Even with slower U.S. shale output—EIA forecasts cut U.S. production by 180,000 bpd—the market remains supply-constrained.
2. Iran’s Potential Return: Citigroup warned that a U.S.-Iran nuclear deal could add 1 million bpd to global supply, pushing prices as low as $50.
3. Geopolitical Risks: Middle East conflicts, including Israel-Houthi clashes, added a risk premium but failed to disrupt physical supply chains.

Fed Policy and Dollar Dynamics

The Federal Reserve’s decision to hold interest rates at 4.25%–4.50% stabilized financial conditions, supporting oil prices by curbing dollar strength. However, Fed Chair Jerome Powell cautioned that unresolved trade disputes could reignite inflation, complicating rate-cut prospects. A stronger dollar—historically bearish for oil—remains a lurking threat, as non-U.S. buyers face higher costs.

Analyst Perspectives: A Delicate Balancing Act

• Deutsche Bank: Characterized the rally as an “unloved rally,” driven by speculative optimism rather than fundamentals. Such rallies historically persist but falter without tangible progress.
• Morgan Stanley: Warned that a U.S.-China breakthrough must materialize within weeks to sustain momentum.
• Hargreaves Lansdown: Highlighted the paradox of prices rising due to both supply constraints and trade optimism, but noted the EIA’s downward revision underscored demand uncertainties.

Data-Driven Risks and Uncertainties

• Trade Talks Outcome: The May talks were the first formal engagement since U.S. tariffs were imposed, but analysts doubt major breakthroughs given domestic political constraints. China’s $1.2 trillion exposure of S&P 500 revenues to U.S. trade policies highlights the stakes.
• OPEC+ Policy: The alliance’s production decisions will continue to weigh on prices.

Conclusion: A Precarious Equilibrium

Brent crude’s May 2025 price swings—from $63.07 highs to dips below $61—reflect a market balancing fragile optimism with structural risks. While trade talks briefly buoyed prices by暗示ing demand resilience, OPEC+ supply decisions, Iranian sanctions relief risks, and Fed policy clouds loom large. The EIA’s downward forecast ($65.85/barrel) and Citi’s bearish scenario ($50/barrel) underscore the vulnerability of this rally to setbacks in diplomacy or supply overhangs.

Investors should remain cautious. The path forward hinges on whether U.S.-China negotiations can transition hope into concrete policy changes—a high-stakes gamble given the history of stalled trade deals. Until then, Brent’s trajectory remains tethered to a thread of diplomacy, with prices likely to remain range-bound near $60–$63 unless catalysts shift decisively.