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Oil Prices Drop on Concerns of Weaker Chinese Demand

March 28, 2022

©namning/AdobeStock
©namning/AdobeStock

Oil prices tumbled more than $6 on Monday as fears over weaker fuel demand in China grew after financial hub Shanghai lockdown efforts to curb a surge in COVID-19 infections.

Brent crude LCOc1 futures slid as low as $113.72 a barrel and were trading down $5.97, or 4.9%, at $114.68 at 1212 GMT.

U.S. West Texas Intermediate (WTI) crude CLc1 futures hit a low of $106.81 a barrel, and were down $5.93, or 5.2%, at $107.97.

Both benchmark contracts rose 1.4% on Friday, notching their first weekly gains in three weeks, with Brent surging 11.8% and WTI climbing 8.8%.

Shanghai has entered a two-stage lockdown of 26 million people on Monday in an attempt to curb the further spread of the coronavirus.  

"This is also prompting growing concerns that China's strict zero-Covid policy will lead to repeated lockdowns in key business centres," said Commerzbank analyst Carsten Fritsch in a note.

Oil demand in China, the largest crude importer globally, is expected to be 800,000 barrels per day (bpd) softer in April compared with "normal" levels as a result, said Bjarne Schieldrop, chief commodities analyst at SEB bank.

Hopes for reconciliation from peace negotiations between Russia and Ukraine, which could start in Turkey on Tuesday according to the Kremlin, also weighed on prices.  

And the bullish reaction to a missile attack by Yemen's Houthis on a Saudi oil distribution facility had ran its course on Friday, said Kazuhiko Saito, chief analyst at Fujitomi Securities.

But he expected the oil market to turn bullish when the Organization of the Petroleum Exporting Countries and allies, known as OPEC+, meet on Thursday to discuss a planned 432,000 bpd increase in production quotas. The group, which has so far resisted calls to accelerate production rises to ease tight crude supply, was "less likely to raise oil output at a faster pace than in recent months," Saito said.

And supply deficits are looming, as April spot volumes of Russian crude will struggle to find buyers, analysts said. Russia's crude flows have been little affected in March as most volumes were contracted pre-invasion.

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

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

OECD stockpiles are at their lowest since 2014.

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

U.S. drillers added oil rigs for a 19th consecutive month but at the slowest pace since 2020 even though the government urged producers to boost output.  

(Reuters - By Rowena Edwards - Additional reporting by Yuka Obayashi in Tokyo, Sonali Paul in Melbourne and Florence Tan in Singapore; editing by David Evans and Louise Heavens)



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