On Monday, oil prices increased to their highest levels in months. This expansion was largely driven by a large trade agreement between the United States and China. This surprise uptick in oil prices comes on the heels of a significant pullback only a week earlier. Analysts at GSC Commodity Intelligence characterized this trade deal as “the most asymmetric and undervalued trade of the year,” highlighting its potential impact on the global oil market.
Brent Crude, the international benchmark, hit $66 a barrel. Just weeks, West Texas Intermediate (WTI) crude oil had breached $63 a barrel. Both contracts closed above $81 and $83 per barrel respectively, levels not seen since early January, signaling a strong rebound in oil prices. Some market analysts speculate there could be a repricing of $10 to $15 per barrel in the coming weeks. This indicates that the increase could persist even further as the effects of the trade deal continue to reveal themselves.
U.S.-China agreement includes significant tariff eliminations or reductions for both sides. This new change will be implemented in the next ninety days, a welcome portent of retreat from the current trade war. As part of this agreement, U.S. tariffs on Chinese goods will fall from 14.5% to 30%. In return, Beijing will reduce its own blanket tariffs on U.S. goods from the current average of 12.5% down to 10%. These modifications go into effect on Wednesday. In return, we anticipate that they’ll work wonders to ameliorate import trade disparities and increase economic revenue and stability.
Today, China has indeed become the world’s largest oil importer. In the same month, the country reported a record high in crude imports—12.6 mb/d—7.4% higher year on year from April 2022. China’s burgeoning appetite for oil will be a powerful upward force of prices. This is especially the case considering the precarious supply landscape in the context of continued geopolitical turmoil.
Key oil-producing regions are just beginning to recover from a series of recent disruptions. Tensions in the Strait of Hormuz and ongoing instability in Libya and Nigeria are adding to the mix. All of this adds to dangerously tight conditions in the oil market, where even a moderate disruption would send prices soaring.
The recent developments underscore the interconnectedness of global markets and how trade agreements can have far-reaching effects beyond immediate economic exchanges. The world will be looking to see how these tariff changes play out. At the same time, oil traders are worried but somewhat optimistic about where prices are headed overall.