XTB News: Concerns About Weaker Chinese Demand Cause Oil Prices to Fall

Oil prices fell more than 6% on Monday as China's financial capital of Shanghai went into lockdown to combat a rise of Covid-19 infections, reviving worries of demand destruction.

By 11:35 a.m. EDT, Brent crude futures were down $7.63, or 6.3 percent, to $113.02 per barrel (1535 GMT). West Texas Intermediate (WTI) oil futures in the United States lost $7.61, or 6.7 percent, to $106.29 a barrel.

Since Russia invaded Ukraine in late February, crude prices have been turbulent. Brent gained about 12% in a week last week, while WTI gained nearly 9%.

“Oil prices began trading lower this week as news of the lockdown in Shanghai's financial center spooked markets with expectations of future economic slowdowns and supply chain concerns,” said XTB analyst Walid Koudmani.

“Oil has lately benefitted from the uncertainty surrounding the Russia-Ukraine war, and as more nations pondered blocking Russian imports – but as many started to price in such an outcome, the focus has shifted to recent Covid-19 developments in the world's second economy.”

Because China is the world's largest crude consumer, the announcement influenced the global oil market. According to Andy Lipow, head of Lipow Oil Associates, the country utilizes around 15 million barrels per day and imports 10.3 million barrels per day in 2021.

“The size of [the] sell-off underscores worries that Covid lockdowns in China may expand, having a big effect on demand at a time when the oil market is attempting to identify alternatives to Russian oil supply,” Lipow said.

On Monday, Shanghai underwent a two-stage lockdown of 26 million people to contain the spread of Covid-19. Bridges and tunnels were blocked, and highway traffic was limited.

“The concern that the lockdowns may expand, along with the lengthy liquidation, has resulted in additional market drop,” said Andrew Lipow, head of Lipow Oil Associates in Houston.

According to Bjarne Schieldrop, chief commodities analyst at SEB bank, oil demand in China, the world's biggest crude importer, is likely to be 800,000 barrels per day (BPD) lower than typical in April.

Prices were also influenced by expectations for progress in peace talks between Russia and Ukraine, which might begin in Turkey on Tuesday.

Another round of peace negotiations between Ukraine and Russia is scheduled for this week, according to Commerzbank, which is also adding to the drop in oil prices.

Crude has had its first positive week in three, with WTI and Brent completing the week 8.79% and 10.28% higher, respectively.

Since Russia invaded Ukraine at the end of February, the oil market has been defined by increased volatility. Prices soared beyond $100 per barrel on the day of the invasion and continued to rise. WTI surpassed $130, reaching its highest level since 2008, while Brent almost touched $140.

Prices, however, did not stay there for long, and on March 14, WTI fell below $100. The unpredictable price action reflects, in part, the numerous unknowns surrounding Russia's oil destiny.

Analysts anticipate a more upbeat tone when the Organization of the Petroleum Exporting Countries (OPEC) and its partners, known as OPEC+, gather on Thursday to debate a projected 432,000-BPD rise in production limits.

OPEC+ is expected to keep to its plans for a slight increase in oil production in May, according to numerous sources close to the club, despite a rise in prices owing to the Ukraine situation and consumer demand for additional supplies.

Meanwhile, supply gaps are forming, with experts predicting that April spot levels of Russian oil would struggle to find customers. Russia's crude shipments were unaffected in March since most quantities were committed before the war.

Declining orders for Russian oil would be replaced by contracts from Southeast Asian nations, Kremlin spokesperson Dmitry Peskov said on Monday, according to Russian official news agency TASS.

Countries such as India and China continue to purchase Russian petroleum, and the Indonesian state energy giant PT Pertamina is the latest to indicate that it is contemplating purchasing Russian oil.

Analysts predict that oil markets will continue to experience the consequences of widespread avoidance of Russian oil.

“We expect 2.5 million barrels per day (BPD) of Russian oil and products to be lost in April,” said SEB's Schieldrop, adding that diesel shortages would enhance demand for Brent crude and light sweet crudes.

Suhail al-Mazrouei, UAE energy minister, stated on Monday that oil should not be withheld from any nation since “the world is in desperate need” of supply.

OECD stocks have reached their lowest level since 2014.

To assist relieve the supply crunch, the US is exploring another release of oil from its Strategic Petroleum Reserve (SPR), although it may be restricted given the already low stockpiles.