Oil falls more than 8% as Shanghai lockdown sparks demand fears

Andrey Rudakov | Bloomberg | Getty Images

Oil fell more than 8% to Monday’s day lows as worries about new restrictions in China and the potential impact on demand sent prices down.

Futures for West Texas Intermediate crude, the US oil benchmark, fell 8.25% to trade at $104.50 a barrel. International benchmark Brent oil traded down 7.4% to $111.61 a barrel.

By 12:35 pm on Wall Street, some of those losses had been reversed. WTI last traded down 5% to $108.19 a barrel, while Brent fell 5% to $114.59.

“Today’s price drop is primarily due to concerns about demand now that the Chinese metropolis of Shanghai has entered partial lockdown,” Commerzbank said in a note to customers on Monday.

China is the world’s largest oil importer, so any slowdown in demand will be reflected in prices. According to Andy Lipow, president of Lipow Oil Associates, the country uses about 15 million barrels per day and imports 10.3 million barrels per day in 2021.

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

Another round of peace talks between Ukraine and Russia is scheduled for this week, which Commerzbank said has also contributed to the fall in oil prices.

Oil ends its first positive week in three, with WTI and Brent ending the week up 8.79% and 10.28% respectively.

The oil market has seen increased volatility since Russia’s invasion of Ukraine at the end of February. Prices jumped above $100 a barrel on the day of the invasion and continued to rise. WTI topped $130, rising to its highest level since 2008, while Brent nearly hit $140.

But prices didn’t stay there for long, and on March 14, WTI traded below $100. The volatility partly reflects the many unknowns surrounding the future of Russian oil.

The International Energy Agency has warned that Russia’s 3 million bpd oil output in April will be at risk as Western sanctions encourage buyers to shun domestic oil. But analysts note that Russian oil is still finding buyers, especially from India.

Traders say the recent volatility is also due to non-energy market participants using oil as a hedge against inflation. Open interest has declined in recent weeks, making the market susceptible to even more intraday swings.

Despite falling on Monday, oil held above $100.

“We continue to expect Brent crude to continue its rally as the market continues to factor in rising energy supply risk amid huge supply disruptions,” TD Securities said on Monday.

“The right tail in energy markets is still fat… The setting is still ripe for higher energy prices,” the firm added.

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