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Oil Drops as China’s Covid Resurgence Imperils Demand

Published Mar 28, 2022 05:15PM ET Updated Mar 28, 2022 06:18PM ET
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© Reuters. Oil Drops as China’s Covid Resurgence Imperils Demand

(Bloomberg) -- Oil fell as China issued more lockdowns, raising fresh concerns about demand slowing down in the world’s biggest crude importer. 

Futures in New York fell more than $7 to trade near $106 on Monday. Markets sold off after authorities in Shanghai said they will lock down half of the city in turns for mass Covid-19 testing. Prices stayed in retreat even after OPEC+ signaled it’s likely to stick to plans for a modest supply increase when they meet Thursday. 

“China oil demand is approximately 15 million barrels per day,” said Andy Lipow, president of Lipow Oil Associates LLC in Houston. “The magnitude of sell-off reflects fears that Covid lockdowns in China could spread, significantly impacting demand at a time when the oil market is trying to find alternatives to Russian oil supplies.”

Traders added that in the wake of historic volatility many market participants are just covering their positions, keeping liquidity at the lowest it’s been at in years and leading to outsized moves on any news.

Russia’s invasion of Ukraine continues to disrupt supplies of key commodities, adding to inflationary pressures on the global economy. Despite the day’s sellofff, oil is still heading for a fourth month of gains as a tight market is exacerbated by Russian oil supply getting shunned by buyers. The country’s exports from March 17-23 fell by more than a quarter from the previous week, according to industry data.

On Monday, United Arab Emirates Energy Minister Suhail Al-Mazrouei said additional crude supplies won’t be added if the market is balanced, and resources are in the market.  OPEC+ isn’t focused on whether the specific loss of Russian shipments is causing an imbalance, he added. If not alterations are made, the cartel will ratify an increase of 430,000 barrels a day for the month of May as previously announced.

Demand concerns are starting to emerge with the spread of the virus in China. Shanghai -- a city of 25 million people -- will first lock down areas east of the Huangpu River, which includes its financial district and industrial parks, for four days starting Monday. Then the restrictions will shift to the city’s west for another four days, according to a statement from the local government.

A temporary pause in hostilities by Yemen’s Houthis against Saudi Arabia was also contributing to lower oil prices on Monday. The group’s rebel leader announced a three-day truce on Saturday after an escalation of attacks on the Saudis over the past week, according to a TV report.

The U.S., meanwhile, said reviving a nuclear deal with Iran is not imminent after recent requests from Tehran that included Washington removes the Islamic Revolutionary Guard Corps from its list of terrorist organizations. Iran is an ally of Russia, and its war in Ukraine is also complicating negotiations.

(Corrects the sixth paragraph in the story that originally published at 2:06 p.m. in New York to show OPEC+ is expected to ratify a production increase of 430,000 b/d)

©2022 Bloomberg L.P.

Oil Drops as China’s Covid Resurgence Imperils Demand
 

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