Oil prices rise more than 4% on US-China trade deal, worries about Iran supply

Oil prices surged over 4% Wednesday following President Trump's announcement of a trade deal with China, raising hopes for increased energy demand in both nations; Brent crude closed at $69.77 and WTI at $68.15. The rally was further supported by a larger-than-expected 3.6 million barrel draw in U.S. crude inventories and rising gasoline demand, alongside ongoing tensions with Iran potentially limiting oil supplies. However, analysts caution that the actual impact on economic growth and global oil demand remains uncertain, even as OPEC+ plans to increase production.

Analysis

Oil prices experienced a significant rally, with Brent crude futures increasing 4.34% to $69.77 per barrel and U.S. West Texas Intermediate gaining 4.88% to $68.15, primarily driven by President Trump's announcement of a U.S.-China trade deal, which has spurred optimism for enhanced energy demand in the world's two largest economies. However, PVM analyst Tamas Varga noted that the trade-related downside risk has only been temporarily removed and the market reaction beyond the initial surge has been tepid, citing uncertainty over the actual impact on economic growth and global oil demand from the deal, which is still subject to final approval by both presidents. Geopolitical tensions with Iran persist, with President Trump expressing diminished confidence in Iran halting uranium enrichment and Iran threatening U.S. bases, suggesting Iranian oil supplies are likely to remain constrained by sanctions. This supply-side support is contrasted by OPEC+'s plan to increase production by 411,000 barrels per day in July. Nevertheless, Capital Economics' analyst Hamad Hussain posits that rising internal oil demand within OPEC+ economies, notably Saudi Arabia, could offset this additional supply. Further bolstering prices, U.S. crude inventories saw a larger-than-anticipated draw of 3.6 million barrels to 432.4 million barrels, a development Mizuho's Bob Yawger termed a "bullish report," coupled with a 907,000 barrels per day increase in U.S. motor gasoline demand to 9.17 million bpd. Lastly, softer-than-expected U.S. consumer price data for May has reinforced market expectations for Federal Reserve interest rate cuts by September, which could potentially stimulate economic activity and, consequently, oil demand.

Key Decisions for Investors

• The confluence of positive demand signals, including the U.S.-China trade deal announcement, a significant U.S. crude inventory draw of 3.6 million barrels, and expectations of Federal Reserve rate cuts, alongside persistent Iranian supply constraints, suggests a constructive near-term outlook for oil prices, although the materialization of the trade deal's benefits remains a key variable.
• Investors should closely monitor the final approval and specific terms of the U.S.-China trade agreement, as its actual impact on global oil demand is yet to be determined, despite the initial positive market reaction.
• While OPEC+ plans to increase production by 411,000 bpd in July, the potential for this to be offset by rising demand within OPEC+ nations, coupled with ongoing Iranian supply disruptions and strengthening U.S. gasoline demand, warrants careful assessment of the net supply-demand balance in the coming months.