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Oil drops over 4% as COVID-19 cases force new lockdowns in China, while Russia and Ukraine talks resume

Mar 28, 2022, 16:54 IST
Business Insider
Oil workers using oil drill.Tetra Images - Dan Bannister
  • Oil was down over 4% Monday as the Chinese financial hub of Shanghai imposed a two-stage lockdown.
  • Volodymyr Zelenskyy said Ukraine was prepared to discuss neutrality in peace talks this week.
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Oil fell as much as 4% Monday as a surge in COVID-19 cases in China resulted in fresh lockdowns and as peace talks between Ukraine and Russia appeared to show signs of progress while the US considered dipping into its Strategic Petroleum Reserve again.

Brent crude futures were down 3.95% at $113.42 a barrel by late morning in Europe, while West Texas Intermediate lost 4.32%, trading at about $109.58 a barrel.

COVID-19 cases have been on the rise in China over the past two weeks, and now Shanghai has launched a two-stage lockdown, starting Monday. The lockdown will see bridges and tunnels closed while traffic is restricted to try to contain the spread.

China is a major consumer of crude oil, and the shutdown is likely to erode local demand for energy.

"This action yet again highlights that China is not willing to drop its zero-covid policy and so continues to be a downside risk for the market," ING strategists said in a note.

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Elsewhere, Ukrainian President Volodymyr Zelenskyy told journalists his country was willing to discuss neutrality as part of the peace talks with Russia, which have yet to show significant progress.

"Security guarantees and neutrality, non-nuclear status of our state. We are ready to go for it. This is the most important point," Zelenskyy said.

Ukraine is unwilling to discuss other demands made by Russia, however, such as the demilitarization of Ukraine, according to Zelenskyy. So far negotiations have centered on Ukraine staying out of NATO, disarmament, and security guarantees. Talks are set to continue in Turkey.

The European Union and other countries are still considering sanctions on Russian oil, which could remove as much as 3% of global daily supply from the market. Some OPEC members believe Russian oil supply is irreplaceable, which was echoed last week at the FT Commodities Global Summit.

"Major oil trading companies Gunvor, Trafigura, Vitol and Mercuria seemed more or less unanimously agreeing that between 2 and 3 million barrels per day of crude and products from Russian exports will be lost to the global market," Bjarne Schieldrop, the chief commodities analyst at SEB, wrote in a note.

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The so-called OPEC Plus group of exporters, which includes Russia, is expected to meet Thursday in what some analysts say could be the most interesting meeting of the year so far, as the group mulls over whether to increase output more aggressively.

"OPEC+ have had more time to assess the impact of the Russia-Ukraine war and so might feel more confident to take action. However, we are assuming that the group will stick to the current plan. Given that Russia is a member of OPEC+, they clearly have a say on what the group decides," Warren Patterson, the head of commodities strategy at ING, wrote.

Reuters notes that the US is considering releasing more oil from its Strategic Petroleum Reserve, possibly more than the 30 million barrels released at the beginning of March, even though total OECD stockpiles are at their lowest point since 2014.

Read more: Barclays shares why Fed hawkishness will put an end to the long-term stock market rally — and lists 7 investing sectors that will still perform in the low-return environment

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