The Trump Trade: Oil Markets React to Tariff Truce Amid Debt and Deficit Concerns

After talks in Geneva, the United States and China reached a trade truce and agreed to roll back most tariffs by Wednesday. The US will cut tariffs on China from 145% to 30%, while China will lower its tariffs from 125% to 10%. Washington also pledged to remove three executive orders that had imposed 115% tariffs and to reduce the “Liberation Day” tariffs from 34% to 10% for 90 days. China will suspend all but 10% of the tariffs imposed since April 2, but key sectors like electric vehicles, steel, and aluminium will still face duties.

Oil Rebounds After US-China Tariff Truce, But Limited Upside

The oil market began to gain traction following the trade deal. Brent crude oil (BCO) increased above $65 per barrel. Similarly, WTI crude oil (CL) surged past $63. The suspension of 24% additional tariffs for 90 days lifted market sentiment. The deal raised hopes for stronger trade flows between the world’s top crude consumers. Restored trade activity could boost global oil demand. However, OPEC’s plan to increase output in May and June may limit further gains.

Meanwhile, the US-Iran nuclear talks in Oman may increase the market supply. If an agreement is reached, oil prices could come under pressure. Last week, US energy firms reduced active rigs to the lowest level since January, indicating a tightening domestic supply. The overall outlook remains volatile, balancing trade optimism with supply-side risks.

US Fiscal Deficit and Tariffs Pose Long-Term Risks to Oil Market

The trade truce has lifted oil prices, but underlying US fiscal conditions remain fragile. A 3% reduction in the US deficit could lead to a similar 3% drop in GDP growth. That level of contraction risks pushing the US economy into a recession. The services-heavy US economy may not adjust quickly to such shocks. Tariffs, acting as a consumption tax on imports, may contract the economy and weaken oil demand if not reinvested.

Deficit and Tariff Pressures Threaten Oil Demand

The chart below shows that rising deficits and low unemployment coincide with inflationary pressure and induce economic downturns.

Trump’s first-term strategy inflated growth through heavy deficit spending. He expanded the fiscal deficit despite low unemployment in 2016. That decision fueled inflation, which was temporarily masked by COVID-related unemployment in 2020. The government continued spending even after the jobless rate fell below 4.0%, adding further inflationary pressure and increasing financial risk.

Rising US Debt and Fiscal Dominance Could Disrupt the Oil Market

The chart below shows that federal debt now stands at nearly 122% of GDP, a historically dangerous level. This high debt raises concerns about fiscal dominance, where policy prioritises protecting debt markets over controlling inflation. A reversal of foreign capital inflows could push interest rates higher. Such a shift may further stress the oil market by increasing dollar volatility and weakening long-term demand. While tariffs and deficits have temporarily supported the economy, their structural effects threaten overall market stability, including energy pricing.

WTI Technical Outlook: Key Support Holds, but Bearish Trend Persists

The weekly chart of WTI crude oil highlights significant structural patterns that align with the macroeconomic themes discussed above. The chart shows that oil prices entered a prolonged downtrend after reaching a major high near $130 in Q1 2022. Following this peak, the price formed a descending triangle pattern, with resistance around the $100 level and support near the $66 level.

The breakout from the descending triangle has pushed the price down toward a long-term pivotal area. This zone, highlighted in orange on the chart, marks the trading range between $55 and $66. It has acted as strong long-term support since the 2022 peak. The price recently touched the lower boundary of this zone, around $55, and began to rebound following the US-China trade truce and tariff rollbacks.

This technical setup shows that the peak formation in 2022, followed by the formation and breakdown of a descending triangle, indicates a continued bearish long-term trend for oil. Following the US-China trade truce, the rebound faces strong resistance in the $65 to $66 area, where the descending triangle was broken. From a technical perspective, WTI oil remains bearish until prices exceed $80.