Oil prices fall sharply as U.S.-China trade war escalates

Investing.com-- Oil prices fell Thursday, handing back some of the previous session's sharp gains on concerns of a deepening Sino-U.S. trade war, which haven't been helped by weak inflation data from top importer China. 

At 07:55 ET (11:55 GMT), Brent oil futures expiring in June fell 2.8% to $63.62 a barrel, while West Texas Intermediate crude futures fell 3% to $60.46 a barrel.

Both contracts soared more than 4% on Wednesday, rebounding after having slumped as much as 7% earlier in the day, following U.S. President Donald Trump’s announcement of a pause on reciprocal tariffs on most countries.

Trump's tariffs pause excludes China 

Trump on Wednesday announced a 90-day extension in his plan to impose “reciprocal” tariffs on major global economies, giving targeted countries more time to hash out trade deals with the U.S.

However, the reprieve excluded China. Trump increased tariffs on Chinese imports to 125% from 104%, deepening a trade standoff with the world’s second-largest economy and a leading consumer of crude.This leaves significant uncertainty over oil demand growth with more risk to downside for prices.

UBS has cut its price forecasts, saying two key downside risks it flagged in at its last oil price update have materialised, namely "OPEC+ is accelerating its production increase and we are likely to see weaker oil demand on the back of U.S. tariffs and lower global GDP."

The Swiss bank cut its Brent price forecast by $6 a barrel to $66 for 2025, by $7 a barrel to $65 for 2026 and by $3 a barrel to $70 for 2027.

"Brent prices have already dropped ~20% to ~$60/bbl since the start of the month and while our base is low to mid-$60s the rest of the year, we expect significant volatility to remain a feature given the uncertainty around both tariffs/demand and OPEC+ policy," UBS analysts said, in a note.

China inflation data underwhelms 

Chinese consumer price index inflation shrank more than expected in March, while producer price index inflation fell for a 30th consecutive month, government data showed on Thursday.

The soft reading came amid a rapidly escalating trade war between the world’s two biggest economies, and reflected some headwinds for consumer spending from a volley of Sino-U.S. trade tariffs. 

Beijing had retaliated against Trump’s initial, 20% tariffs with similar measures - a move that likely weighed on local demand. 

But the soft inflation reading furthered concerns that a prolonged trade war will further weigh on the Chinese economy and stymie its demand for oil. Chinese oil imports have steadily declined in the past year, amid sluggish economic growth in the country. 

U.S. crude inventories build 

Elsewhere, a bigger-than-expected build in U.S. inventories also weighed on oil markets, as it pointed to strong supply in the world’s biggest fuel consumer. But an outsized draw in distillates pointed to some resilience in demand. 

"U.S. inventory data from the Energy Information Administration shows that crude oil inventories increased by 2.55m barrels over the last week. This takes stocks to a little over 442m barrels -- the highest since July. Meanwhile, crude stocks at Cushing grew by 681k barrels, leaving stocks at the WTI delivery hub at their highest level since November," said ING analysts, in a note.

(Ambar Warrick contributed to this article.)