Oil prices slip as Chinese COVID cases reach record highs and lockdowns intensify
- Oil prices dropped up to 2% on Monday as Chinese COVID restrictions dented demand.
- The IEA said last week members will release 120 million barrels of reserves to supplement supply shortfalls.
Oil fell on Monday, as rising COVID cases in China and intensifying restrictions threatened the demand outlook, just as Western nations coordinated a huge release of strategic energy reserves to make up for any shortfalls in Russian supply, as sanctions mount in response to Vladmir Putin's war in Ukraine.
Brent crude futures fell 2.31% to trade at $100.43 a barrel on Monday, while West Texas Intermediate dropped 2.47% to trade at about $95.83 a barrel.
"Prices are under pressure for front contracts in particular for crude oil: on the demand side due to the fear of an extension and even widening of covid lockdowns in China, and on the supply side by the massive, coordinated release of strategic reserves in coming months is pressuring oil prices. For Brent crude, the $100 a barrel remains an important psychological support," the Saxo Bank strategy team said.
Chinese financial hub Shanghai has been under a strict and indefinite lockdown as COVID cases a surge across the nation. Restrictions have stopped residents from leaving their homes to buy essential items, people across the city have said they are running out of food.
As Shanghai enters its third week of lockdowns, cities across China are adding new restrictions to comply with the government's zero COVID policy. The southern city of Guangzhou was the latest to add new restrictions.
These restrictions have hit demand for fuel, particularly last week as the Qingming Festival took place – the Chinese Ministry of Culture and Tourism reported travel during the festival was down 26% year on year.
Despite the toll this has taken on the tourism sector and the reports of citizens losing patience with COVID restrictions, according to Sky News Chinese news site Xinhua reported on Sunday that it would be disastrous to lift restrictions now and could lead to a collapse of the medical system, suggesting lockdowns aren't going to be eased any time soon.
In terms of the oil market, with the demand side looking less bullish, last week's commitment by International Energy Agency members, including the US, to release a up to 240 million barrels of oil over the next six months has removed some of the concern about supply shortages that pushed Brent up towards $140 a barrel last month.
The IEA's release, together with the United States' commitment to release 180 million barrels of oil over six months, has helped cool some of those concerns and knocked about 25% off the price of Brent since mid-March's 14-year highs.
For now, Russian crude oil has continued to flow to consumers, mostly uninterruptedly, but traders have been shunning cargoes of Urals for weeks and analysts estimate any further sanctions could knock as much as 3 million barrels a day out of the global supply pool.