Oil tumbled to the lowest level since December as a wave of unrest in China punished risk assets and clouded the outlook for energy demand, adding to stresses in an already-fragile global crude market.
West Texas Intermediate sank toward $74 a barrel following three weeks of losses. Protests over harsh antivirus curbs erupted across the world’s largest crude importer over the weekend, including demonstrations in Beijing and Shanghai, spurring a broad sell-off in commodities as the week opened. The rare show of defiance is raising the threat of a government crackdown.
The unrest aided the dollar as a haven, making raw materials less attractive, while hurting mobility in China. It also brings the possibility that authorities could respond with tighter curbs, with Covid-19 cases hitting a record this month, although others speculate the pace of easing could pick up.
Oil’s leg lower is the latest twist in what’s been a tumultuous 12 months, with volatility driven by the war in Ukraine, aggressive central bank tightening to combat inflation, and China’s relentless attempts to eradicate Covid-19. In recent days, European Union diplomats have also been locked in talks over a cap on Russian crude prices, with negotiations set to resume later on Monday.
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“Sentiment in the oil market remains negative, and developments over the weekend in China will certainly not help,” said Warren Patterson, head of commodities strategy at ING in Singapore.
Congestion data from Baidu showed peak-hour traffic in major Chinese cities on Monday morning declining sharply. In Beijing, the capital, traffic was down 45 per cent from a year ago, while in Guangzhou it was 35 per cent lower. Chinese oil demand could average of 15.11 million barrels a day this quarter, down from 15.82 million a year ago, according to Kpler, a data and analytics firm.
The “demand outlook will deteriorate before it gets better, said Fenglei Shi, director of Greater China oil market midstream and downstream at S&P Global Commodity Insights, citing an uptick in lockdowns.
Aside from China, traders were also assessing a US move to grant supermajor Chevron a license to resume oil production in Venezuela after sanctions had halted all drilling activities almost three years ago. The sanctions relief comes after Norwegian mediators announced the restart of political talks between President Nicolas Maduro and the opposition this weekend.
Key market metrics are signalling weaker conditions. WTI’s prompt spread – the gap between its nearest two contracts – was 17 cents a barrel in a bearish contango pattern compared with $1.29 a barrel in backwardation a month ago.
Since the onset of the pandemic, China’s approach to dealing with Covid-19 has been founded on mass testing and widespread lockdowns to suppress outbreaks, along with vaccinations. That’s hurt energy demand and spurred a build-up of resentment about the restrictions as other nations opened back up. Despite the web of rules, virus cases rose to a record this month.
In Europe, EU members can’t yet forge a consensus on how strict the Group of Seven-led price cap on Russian oil should be. While Poland and the Baltic nations have objected to a proposal for $65-a-barrel limit, making the case that it would be too generous to Moscow, shipping nations like Greece favour a higher level. Russia has said it will ban oil sales to anyone participating.
Gains in the US dollar typically make commodities priced in the currency more expensive for importers. As traders tracked developments in China, a Bloomberg gauge of the greenback advanced as much as 0.5 per cent. – Bloomberg
