LONDON— Oil prices fell sharply on Tuesday, erasing early gains as renewed trade tensions between the United States and China—the world’s two largest economies—rattled global markets. Investors were further unsettled after the International Energy Agency (IEA) warned of weakening demand fundamentals in its latest report.

Oil Prices Retreat to Five-Month Lows

By mid-morning London time, Brent crude futures were down $1.01, or 1.6%, at $62.31 per barrel, while U.S. West Texas Intermediate (WTI) futures dropped 95 cents, or 1.6%, to $58.54. Both benchmarks hovered near their lowest levels in five months, reflecting growing concern that geopolitical and trade pressures could stifle global growth and energy consumption.

The declines came after a modest rally in the previous session, when Brent closed 0.9% higher and WTI rose 1%, buoyed by short-lived optimism over possible diplomatic progress in global trade and geopolitical conflicts.

Analysts Warn of Mounting Market Uncertainty

Energy analysts said investors are struggling to make sense of overlapping developments, from Middle East peace talks to oil infrastructure attacks in Ukraine and Russia, and the reignition of the U.S.–China trade war.

“Investors are still assessing the potential consequences of the Middle East peace process, ongoing attacks on Ukrainian and Russian oil installations, and the possibility of reigniting the trade war between the world’s two economic behemoths,” said Tamas Varga, senior oil analyst at PVM Oil Associates.

Varga noted that the current environment has heightened volatility, with traders torn between geopolitical risks that could tighten supply and economic headwinds that could suppress demand.

U.S.–China Trade Tensions Deepen

The U.S.–China trade relationship has come under renewed strain following Beijing’s expansion of rare earth export controls and Washington’s threats of 100% tariffs and software export restrictions slated to take effect on November 1.

On Monday, U.S. Treasury Secretary Scott Bessent said President Donald Trump remains committed to meeting Chinese President Xi Jinping in South Korea later this month, an event that investors hope could calm markets.

Still, recent developments—including Beijing’s sanctions against five U.S.-linked subsidiaries of South Korean shipbuilder Hanwha Ocean and the mutual imposition of new port fees on ocean freight—have reignited fears of a broader trade confrontation that could hit commodity flows, including oil.

“The trade war narrative has returned with full force,” said one London-based energy trader. “The rhetoric between Washington and Beijing is again shaping market sentiment more than fundamentals.”

IEA Cites Weakening Fundamentals

In its October monthly oil market report, the International Energy Agency raised its global oil supply growth forecast for 2025 after the OPEC+ alliance announced plans to increase production.

However, the IEA simultaneously cut its demand growth projection, citing a deteriorating macroeconomic outlook amid tightening financial conditions and rising trade barriers.

The agency warned that a prolonged U.S.–China trade conflict could further weaken industrial activity and consumer confidence, dragging down fuel demand across major economies.

OPEC+ Sees Market Rebalancing Ahead

A day earlier, the Organization of the Petroleum Exporting Countries (OPEC) and its allies, including Russia, predicted that the oil supply shortfall would narrow by 2026, as planned output increases gradually rebalance the market.

Still, traders remain cautious, noting that recent declines in oil prices reflect ample near-term supply and a softening demand outlook.

Market Structure Shows Signs of Weakness

The Brent six-month spread narrowed to its smallest premium since early May, while the WTI spread shrank to its tightest level since January 2024.

This narrowing backwardation—a market condition where prompt prices trade above future delivery contracts—suggests that the incentive to sell oil in the spot market is diminishing, a sign that near-term supply is more than sufficient to meet current demand.

Looking Ahead: Markets Watch Trump–Xi Meeting

Investors now await further signals from U.S.–China negotiations, with attention focused on the upcoming Trump–Xi meeting at the APEC summit in Seoul later this month.

Analysts say a successful diplomatic outcome could restore some confidence in the global energy market, while a collapse in talks could trigger another wave of selling pressure across oil and equity markets alike.

“Oil remains hostage to geopolitics,” said one European energy strategist. “Until we see real de-escalation between Washington and Beijing, downside risk will dominate.”