Oil sinks on concerns of weaker Chinese demand

NEW YORK: Oil prices tumbled more than 6 percent on Monday after China's financial hub of Shanghai launched a lockdown to curb a surge in Covid-19 infections, prompting renewed fears of demand destruction.

Brent crude futures were down $7.63, or 6.3 percent, to $113.02 a barrel by 11:35 a.m. EDT (1535 GMT). U.S. West Texas Intermediate (WTI) crude futures fell $7.61, or 6.7 percent, to $106.29 a barrel.

Crude futures have been volatile since Russia's invasion of Ukraine in late February. Last week, Brent gained nearly 12 percent for the week, while WTI rose almost 9 percent.

“Oil prices started this week trading lower after news of the lockdown in the financial hub of Shanghai shook markets with prospects of further economic slowdowns and supply chain issues," said XTB analyst Walid Koudmani.

"Oil benefited recently from the uncertainty surrounding the Russia-Ukraine conflict and as more countries considered banning Russian imports -- but as many began to price in such an event, attention has turned to recent Covid-19 developments in the world´s second economy."

The news impacted the global oil market because China is the world´s biggest crude consumer. The nation uses around 15 million barrels per day, and imported 10.3 million barrels per day in 2021, according to Andy Lipow, president of Lipow Oil Associates.

“The magnitude of [the] sell-off reflects fears that Covid lockdowns in China could spread, significantly impacting on demand at a time when the oil market is trying to find alternatives to Russian oil supplies,” Lipow said

Shanghai has entered a two-stage lockdown of 26 million people on Monday in an attempt to curb the spread of Covid-19. Officials closed bridges and tunnels and restricted highway traffic.

"The fear that the lockdowns could spread combined with a long liquidation has resulted in further decline of the market," said Andrew Lipow, president of Lipow Oil Associates in Houston.

Oil demand in China, the largest crude importer globally, is expected to be 800,000 barrels per day (bpd) softer than usual in April, said Bjarne Schieldrop, chief commodities analyst at SEB bank.

Hopes for progress in peace negotiations between Russia and Ukraine, which could start in Turkey on Tuesday, also weighed on prices.

Another round of peace talks between Ukraine and Russia is slated for this week, which Commerzbank said was also contributing to oil’s slide.

Crude is coming off its first positive week in the last three, with WTI and Brent ending the week 8.79% and 10.28 percent higher, respectively.

The oil market has been marked by heightened volatility since Russia’s invasion of Ukraine at the end of February. Prices shot above $100 per barrel the day of the invasion and kept climbing. WTI topped $130, rising to its highest level since 2008, while Brent almost reached $140.

But prices didn’t remain there for long, and on March 14 WTI traded under $100. The volatile action reflects, in part, the many unknowns around the future of Russia’s oil.

However, analysts expect more bullish sentiment when the Organization of the Petroleum Exporting Countries (OPEC) and allies, collectively known as OPEC+, meet on Thursday to discuss a planned 432,000-bpd increase to production quotas.

OPEC+ will likely stick to its plans for a modest increase in its oil output in May, several sources close to the group said, despite a surge in prices due to the Ukraine crisis and calls from consumers for more supply.

Supply deficits are looming, meanwhile, with April spot volumes of Russian crude expected to struggle to find buyers, analysts said. Russia's crude flows have been little affected in March as most volumes were contracted before the conflict.

Declining orders for Russian oil will be replaced with contracts from Southeast Asian countries, Russian state news agency TASS cited Kremlin spokesman Dmitry Peskov as saying on Monday.

Countries such as India and China are still buying Russian crude and Indonesian state energy company PT Pertamina has become the latest to announce it is considering buying Russian oil.

However, analysts still expect oil markets to feel the effects of widespread avoidance of Russian oil.

"Expectations are that 2.5 m bl/d of Russian crude and products will be lost in April," SEB's Schieldrop said, adding that diesel shortages will increase demand for Brent crude and light sweet crudes.

Oil should not be withheld from any country because "the world is in dire need" of supplies, UAE energy minister Suhail al-Mazrouei said on Monday.

OECD stockpiles are at their lowest since 2014.

To help to ease tight supply, the United States is considering another release of oil from the Strategic Petroleum Reserve (SPR), but it could be limited given the already low inventories.