To say that the return of risk appetite in the second half of last week was akin to a Lucullan feast would be a fervent statement, nonetheless, there was a discernible hunt for assets such as equities, the dollar and oil. The optimism was the result of actual and proposed trade negotiations between the US and its trading partners. President Trump can undeniably declare a victory over one of its steadfast allies, the UK, after a trade deal was announced on Thursday. The announcement came with the usual misleading narrative, saying that it was a comprehensive agreement. Well, it was not, it was a partial one. The 25% tariffs on cars and car parts were lowered to 10%, and most UK goods will have the same tariffs. Import taxes on steel and aluminium imports were scrapped. Whilst UK goods are levied at a higher rate than pre-Trump, the UK’s digital tax of 2% remained unchanged. Additionally, the UK removed its 20% import tariffs on US beef imports. Yet, the deal was seen as a positive template for the rest of the world, something that we would find dubious.

In further developments, India has suggested to narrow the tariff gap significantly between the most populous country and the biggest economy. India, which ran a trade surplus of $46 billion last year with its biggest trading partner, offered to reduce the chasm between the import taxes from 13% to 4% without weighting for trade volume, including cutting excise duties to 0% on 60% of the tariff lines.

The 400-pound trade gorilla, however, is China and the fact that it was willing to sit down with US representatives in Geneva last weekend to de-escalate the current tension between the two economic juggernauts was also seen as a conducive move. No breakthrough was expected, and no breakthrough was achieved, although the US President, without elaborating, hailed the ’total reset … in a friendly and constructive manner’.

Global and US equities lost value over the last 5 days, but trade talks clearly brightened investors’ mood as manifested in the jump in the second half of the week. As heartening as the return of this optimism seems, it would be perilous to get carried away. Donald Trump hinted at an 80% tariff on Chinese goods, which, if reciprocated by its counterpart, will trigger massive economic headwinds embodied in slowing economic growth and elevated consumer prices. Perhaps the latest Chinese economic data, which showed rising total exports but diminishing shipments to the US, is the harbinger of things to come. Chinese flows will be re-aligned. On a broader scale, it is quite straightforward that tariffs, even if they are only 10% on average, will lead to slowing global trade, deteriorating conditions in the labour market and inflation and maybe even recession. 

In the Meantime, in Oil…

Oil faithfully followed equities higher, and regional tensions between Ukraine and Russia, India and Pakistan and Israel and Hamas also contributed to the weekly gains. The geopolitical thermostat, however, was turned down by a few notches towards the end of last week and over the weekend. After European leaders visiting Kiev called for a 30-day unconditional truce, Russia showed a willingness for direct talks with Ukraine. A US-brokered ceasefire has been reached between Indian and Pakistan. Earlier last week the US President declared an end to attacks on Yemen, whilst Iranian nuclear talks are ongoing. Whether this relative calmness is maintained on a prolonged basis is anything but definite, simply because of the widely diverging interests and goals of the adversaries in these political hotspots around the world.

Even if conflagrations around oil-producing regions intensify again, a protracted rally in oil remains questionable from a fundamental perspective. Fears of recession impede economic expansion and, therefore, oil demand growth. Although the EIA revised upwards its global oil demand for 2025, and for the 2Q-4Q 2025 period, the annual growth will be inferior to non-DoC supply growth. There will be a shrinking need for OPEC+ oil at a time when the producer group has decided to prioritise market share over balancing the market. The latest Reuters survey suggests a slight fall in the group’s production last month, but it is expected to increase by 411,000 bpd in May. Every quarter of this year, including the incumbent one, is forecast to see considerable swelling of global oil inventories, the EIA predicts: 2Q 480,000 bpd, 3Q 420,000 bpd and 4Q 750,000 bpd. Confirmation should come from the IEA, which will publish its updated projection on Thursday, following the comparatively upbeat OPEC monthly report a day earlier.

The perceived supply surplus is not only echoed in downgrades in price forecasts but also in the changing nature of the Brent structure. The backwardation on the front-end still persists but has been narrowing since the end of April. The M1/M2 spread fell from $1/bbl to 33 cents/bbl last Wednesday, although it picked up to 49/cents/bbl by Friday’s settlement. The monthly price differentials flip into contango from December 2025 onwards, implying expectations of a well-supplied market towards 4Q this year. The M1/M7 Brent spread is now $1.20-$1.30, hardly 20 cents/bbl a month compared to $2.88/bbl on April 22. Dated Brent for this week is assessed around 15 cents/bbl over the forward contract, a spectacular plunge from the premium of $2.50/bbl recorded only three weeks ago. The perpetually changing nature of trade wars and regional political tensions can and should provide temporary price supports intermittently, but if one believes that the status quo of global trade has been irrevocably upended and that OPEC+ is now determined to re-claim seized territory in the supply market, global oil inventories will grow, effectively setting unsurmountable obstacles for any attempt to push oil prices considerably higher.

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