Oil prices drop amid trade talks and geopolitical uncertainty

[WORLD] Oil prices dropped more than US$1 a barrel on Wednesday, as investors grew skeptical about the prospects of a breakthrough in the upcoming US-China trade talks. At the same time, easing concerns over a potential US-Iran nuclear deal helped alleviate fears over oil supply disruptions.

Brent crude futures closed down US$1.03, or 1.66%, at US$61.12 a barrel, while US West Texas Intermediate crude fell by US$1.02, or 1.73%, to settle at US$58.07 a barrel.

The US and China are scheduled to meet in Switzerland for discussions that could mark the first step toward addressing the ongoing trade war, which has disrupted global economic stability. Oil prices, in particular, are highly sensitive to shifts in the global economic outlook, with any signs of progress in trade negotiations boosting investor optimism. A resolution to the trade conflict could spur economic activity and lead to greater demand for oil.

The talks come after weeks of escalating tensions, during which tariffs on goods traded between the two countries have surged by more than 100%. "While the meeting may signal a thaw, expectations for a breakthrough remain low," said Thiago Duarte, a market analyst at Axi. "Unless the US gains significant trade concessions, further de-escalation seems unlikely."

US Treasury Secretary Scott Bessent characterized the upcoming meeting with Chinese officials as "the opposite of advanced." Meanwhile, US Vice President JD Vance expressed cautious optimism about the US's discussions with Iran, describing them as "so far, so good." He noted that a potential deal could reintegrate Iran into the global economy while preventing the country from acquiring nuclear weapons.

Phil Flynn, a senior analyst with Price Futures Group, highlighted the possibility of the US lifting sanctions on Iranian oil. "If that happens, Iran, with its significant oil production capacity, could quickly re-enter the global market, adding supply and potentially pushing prices lower," Flynn said. The prospect of increased Iranian oil production is closely watched by market participants, as it could significantly affect the balance of supply and demand in the oil market.

The US had previously threatened to impose secondary sanctions on Iran after a fourth round of talks was delayed. Iran produces over 3 million barrels of oil per day, accounting for roughly 3% of global output.

The Federal Reserve kept interest rates unchanged, but expressed growing concerns about higher inflation and rising unemployment, adding to the uncertainty surrounding the US economy. The central bank continues to grapple with the economic impact of former President Trump's tariff policies.

Further weighing on oil prices, data from the Energy Information Administration (EIA) revealed an unexpected rise in US gasoline inventories last week, raising doubts about demand during the upcoming summer driving season. The increase in gasoline stockpiles comes as the US typically sees higher fuel consumption in the summer months, which usually supports oil prices. However, weaker-than-expected demand this year may be linked to ongoing economic uncertainties and lingering effects from the pandemic.

"This is the first negative report for gasoline in a few weeks. Refiners had been ramping up utilization rates, but this report shows a reversal," said Bob Yawger, director of energy futures at Mizuho.

On a positive note, US crude inventories declined by 2 million barrels to 438.4 million barrels, surpassing analysts' expectations of an 833,000-barrel draw, according to a Reuters poll. Despite these mixed signals, some US producers have indicated plans to scale back spending, signaling that domestic oil output may have reached its peak.

Geopolitical risks also continue to influence the market. Tamas Varga, an analyst at PVM, noted that tensions between Israel and the Houthis in the Middle East are increasing the geopolitical risk premium. Any escalation of the conflict could disrupt oil supply routes, particularly in the Red Sea region, leading to sharp price fluctuations.

With Opec+ supply disruptions and unpredictable US policymaking, oil market volatility is expected to persist in the near future.