Oil prices climb to 2-month high on US, China trade agreement

Oil prices rose 2% on Wednesday, to their highest in more than two months, as President Donald Trump said the US had a trade deal with China, feeding hopes for the outlook for energy demand in the world's two largest economies.

Brent crude futures rose $1.32, or 1.97%, to $68.19 a barrel at 11:35 a.m. EDT (1535 GMT). US West Texas Intermediate crude was up $1.51, or 2.32%, to $66.49. Both Brent and WTI reached their highest in more than two months.

Trump said Beijing would supply magnets and rare earth minerals and the US will allow Chinese students in its colleges and universities. Trump added the deal is subject to final approval by him and President Xi Jinping.

The trade-related downside risk in oil has been temporarily removed, although the market reaction has been tepid as it is not clear how economic growth and global oil demand will be affected, PVM analyst Tamas Varga said.

Trump said he was less confident that Iran would agree to stop uranium enrichment in a nuclear deal with Washington, according to an interview released on Wednesday.

In the US, crude inventories fell by 3.6 million barrels to 432.4 million barrels last week, the Energy Information Administration said on Wednesday. Analysts polled by Reuters had expected a draw of 2 million barrels.

"It's a bullish report," said Bob Yawger, director of energy futures at Mizuho, adding that the demand for motor gasoline began to strengthen.

Product supplied for motor gasoline, a proxy for demand, rose by about 907,000 barrels per day last week, to 9.17 million bpd.

US consumer prices increased less than expected in May, deepening the conviction in financial markets that the Federal Reserve will start cutting interest rates by September. Lower interest rates can spur economic growth and demand for oil.

Wall Street stocks gained and the dollar and US Treasury yields dipped on Wednesday after President Donald Trump said a U.S.-China trade deal was done and a fresh report on US consumer prices in May showed only a marginal increase. A White House official said the agreement with China allows the US to charge a 55% tariff on imported Chinese goods, including a 10% baseline "reciprocal" tariff, a 20% tariff for fentanyl trafficking and a 25% tariff reflecting pre-existing tariffs. China would charge a 10% tariff on US imports, the official said. Trump also said that Beijing would supply magnets and rare earth minerals while the US will allow Chinese students in its colleges and universities. Separately, the Consumer Price Index (CPI) increased 0.1% in May amid cheaper gasoline after rising 0.2% in April, the US labour Department said on Wednesday, but inflation is expected to accelerate in the coming months on the back of the Trump administration's import tariffs.

Chris Zaccarelli, chief investment officer for Northlight Asset Management in Charlotte, said the likely US China trade deal and consumer price data should support markets.

"The narrative around tariff-induced inflation should subside," he wrote in an email. "We are still cautious, but many of the risks that were present in early April appear to be receding." The Dow Jones Industrial Average gained 0.4%, the S&P 500 advanced 0.3%, and the Nasdaq Composite rose 0.4%. Tesla shares added about 2% after Elon Musk also said he regretted some of the posts he made last week about Trump, opening the way to a healing of an abrupt rift that has roiled Washington and hurt shares in the electric carmaker. Asian shares were slightly more positive, with MSCI's broadest index of Asia-Pacific shares outside Japan up 0.65%, while the STOXX benchmark for major European shares were little changed.

AUCTION ANGST: The reaction in currency markets was muted, with the dollar weakening slightly against the Japanese yen to trade at 144.83 . The euro edged up 0.46% to $1.147, nudging the dollar index down 0.24% to 98.72. Ten-year Treasury yields fell 3.4 basis points to 4.44%, but bond investors also waited for an auction of $39 billion in 10-year notes later in the day, anxious to see if foreign buyers turn up.

Concerns about huge US budget deficits and debt have combined with unease over the White House's shifting policies to make investors demand a higher term premium for holding Treasuries. Following the consumer pricing data, traders of short-term interest-rate futures priced in a 70% chance of a quarter-point reduction in the Fed policy rate by September, compared with 57% earlier. Policymakers are widely expected to keep rates unchanged next week..

"Another month goes by with little evidence of tariffs, but the longer-term inflation challenge they pose remains," Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management, wrote in an email. "Given the Fed likely shares that outlook, no one should be looking for rate cuts in the near future." In commodity markets, gold gained 0.5% to $3,337 an ounce .

Oil prices rose to a seven-week high as markets assessed the outcome of the U.S.-China trade talks. US crude rose 2% to $66.30 a barrel and Brent rose to $68.04 per barrel, up 1.75% on the day.

Agencies