Global equities and oil have re-taken vast swathes of the territory they lost in the sell-off triggered by Donald Trump's ill-fated tariff announcement on April 2. The reasons for the reversal are numerous. After a significant sell-off perceived positive developments tend to bear more significance than they should; it is always tempting to buy into massive dips. Apart from China, the implementation of the excise duties was paused for 90 days just 12 hours after they had come into effect providing breathing space and hope for market players. As for our market, the current price jump is also undeniably aided by genuine tightness in the physical market as mirrored in the $1/bbl backwardation in the front-end Brent structure or the more than $1.6/bbl premium dated Brent commands over the forward contract for the nearest week. It is also worth underlining that US commercial stocks are cautiously trending lower. They are below the end-2024 level implying no significant global or OECD stock drawdown in the first quarter of the year and possibly beyond. Yesterday’s weekly EIA report, thanks to considerable drawdowns in gasoline and distillate stocks, puts commercial stockpiles 25 million bbls below last year’s level and 13 million under the seasonal 5-year average, resulting in an uptick in crack spread values.

Considering the prevailing buoyant mood the question must be asked: is the worst over and if it is, how long will the developing optimism last? Given the capricious nature of the US administration and its major influence on shaping investor sentiment, it is impossible to provide a reassuring answer. All one can do is examine different scenarios and their potential impacts on markets. For this note, we consider four possibilities: upside and downside risks driven by economic/trade/demand or supply side factors.

Upside risk from demand: the US administration’s trade policies have precipitated almost immeasurable damage to its credibility, which sent stock prices diving. The loss of trust quickly dawned on US policymakers, hence the 90-day pause on implementing individual measures, although blanket 10% tariffs remain in place, except China. Negotiations are underway and officials are apparently upbeat about the outcome. When one considers that President Trump won last year’s election mainly on economic pledges, it becomes obvious that he needs to avoid, by almost any cost, elevated inflation and/or recession. Failing to do so will cost him dearly at the 2026 midterm elections. It is only reasonable to anticipate agreements with former allies in months ahead. Since the US and China are collectively responsible for more than half of the global output, a meaningful trade deal between the two behemoths is unreservedly imperative. It would reduce the risk of inflation and recession and would be conducive to oil demand growth. In the latest salvo, an ostensible capitulation, the US is considering lowering Chinese import taxes, possibly to between 50% and 65%. Was yesterday’s 3% rally in US equities then justified? The anchoring bias, which leads us to rely heavily on previous information, ie. on tariffs around 125%-145%, would suggest so. On the other hand, when one considers that her iPhone would ‘only’ cost 50% more or when the new proposal is set against the 7.5%-25% tariff range imposed in 2018-2020, it is anything but auspicious.

Upside risk from supply: the Middle East crisis is a genuinely frightening prospect. With President Trump, the unconditional ally of Israel in the White House, Benjamin Netanyahu feels emboldened to launch the most significant push to achieve his ultimate regional ambition, to deprive Iran of its nuclear capabilities. Such a move is only feasible with US approval and even with its direct participation, but the consequences are unforeseeable. The ongoing negotiations between the US and Iran could easily turn out to be a charade before an offensive against the Persian Gulf nation begins. Lost Iranian barrels would inevitably tighten the oil balance. The more severe repercussions would come in the form of the closure of the Strait of Hormuz or Iranian retaliation on oil facilities in the region, similar to the one experienced in 2019.

Downside risk from demand: trade agreements might be struck further down the line, but the immediate future is ominous. It is anything but clear how the Trump apparatus will move when the 90-day pause on tariffs lapses. Failing to cut deals shortly and ultimately increasing tariffs on trading partners will be met with reciprocal measures and will not be well received by markets. Trade agreements, although they would not reduce the trade deficit or help repatriate manufacturing to the US, would support the US and global economies. It, however, must be underscored, that hefty Chinese tariffs, both ways, are already at work and their effect will show up in economic data for April when they are published next month. Anxiety levels will increase, fears of stagflation will rise, and stock markets and oil might plummet once again. The first indication is bleak. US business activity slowed considerably this month, an unmistakable sign of the adverse impact of the trade war. Last night’s exemption of carmakers from some tariffs is another sign of US backtracking.

Downside risk from supply: eventual and seemingly unlikely peace accords between Russia and Ukraine and the US and Iran will increase the volume of available oil. The odds of such a truce appear minimal currently. The great unknown is OPEC+. Kazakhstan rocked the boat yesterday when it openly rebelled against its output ceiling arguing that national interest overwrites OPEC+ obligations. Such defiance envisages looser oil balance but more importantly, it implies that Kazakhstan de facto ceases to exist as a member of OPEC+ although it remains in the alliance, for now. However, when combined with the latest OPEC+ bombshell, namely that the group is contemplating hastening the output increase for the second successive month in June, one cannot help but fear for the cohesion within the group. The practical implication would be lax group-wide adherence to any quota system at best and an all-out internal supply war at worst.

As usual, there is a lot to ponder. Or it might be more accurate to conclude that there is more than usual to ponder. Unpredictability leads to pragmatism and volatility. Unless the fault lines in trade policies become visible and permanent, macroeconomic considerations will keep a lid on risk appetite. As an FT columnist so aptly put it; while Trump is in charge, stay short on America.

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