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Futures Movers: Oil drops about 7% as China COVID outbreak clouds demand outlook

Oil prices fell by more than 6% on Monday as a worsening COVID outbreak in China threatened to hurt energy demand and hope for progress amid peace talks between Russia and Ukraine helped ease some concerns over risks to energy supplies.

Price action

West Texas Intermediate crude for May delivery 



dropped $7.49, or 6.6%, to $106.41 a barrel on the New York Mercantile Exchange. Front-month contract prices rose10.5% last week, according to Dow Jones Market Data.

May Brent crude 


 the global benchmark, sank $7.82, or 6.5%, to $112.83 a barrel on ICE Futures Europe. Prices surged nearly 12% last week.

April natural gas

 lost 1% to $5.513 per million British thermal units, after ending up nearly 15% last week.

April gasoline

fell 6.7% to $3.236 a gallon, after gaining 7.1% last week, while April heating oil 

dropped 7.1% to $3.822 a gallon. Prices surged over 14% last week.

Market drivers

China began to lock down the bulk of its financial capital and largest city Shanghai on Monday. The two-phased rollout will be the most extensive since officials confined the entire population of Wuhan — the epicenter of the original outbreak — to their homes in early 2020.

“Global markets seem to be a bit nervous about the effectiveness of China’s zero-tolerance policy toward COVID and the potential for more demand and supply chain disruptions as we might be only dealing with the tip of the iceberg,” said Stephen Innes, managing partner at SPI Asset Management, in a note to clients.

Read: Failed China ‘zero-COVID’ policy tops list of 2022 geopolitical risks: Eurasia Group (Jan. 3)

Traders also remained wary of escalating tensions and violence over Russia’s ongoing war in Ukraine as they eyed peace talks between Russian and Ukraine for potential progress that could ease risks to global energy supplies.

“The oil market is selling off on comments about peace and cease-fire, but the truth is that whether or not peace is achieved, Europe is still addicted to Russian oil and gas,” said Phil Flynn, senior market analyst at The Price Futures Group, in a daily note. 

Read: Why Biden’s landmark natural gas deal won’t break Europe’s dependence on Russia — but could transform the market over the long run

Several European Union countries have resisted pressure to join a U.K. and U.S. embargo on Russian oil due to their heavy reliance on energy supplies from the country.

War in Ukraine: Zelensky accuses West of cowardice in plea for jets, tanks

Another geopolitical hot spot appeared to cool on Monday, as Iranian-backed rebels in Yemen reportedly offered a truce on Saturday. That came after Saudi Arabia and its allies attacked targets in that country in response to a Houthi rebel attack on an oil depot Friday in Jeddah.

Markets are also looking ahead to Thursday’s meeting of OPEC and non-OPEC members.

“Investors wonder if OPEC will finally boost its oil output to counter the Russian supply disruptions at this week’s meeting, as a potential boycott on Russian oil could lead to a 3-million-barrel fall per day from April, even though the Europeans are not up for banning the Russian oil for now,” said Ipek Ozkardeskaya, senior analyst at Swissquote, in a note to clients.

Read: Why OPEC+ is likely to stick to its oil output plan when it meets next week

The market appears to mostly agree that producers will stick to the current plan for gradual output increases.

In a July meeting last year, OPEC+ said that starting May 1, 2022, baseline output for the group would climb to 45.485 million barrels a day from 43.853 million.

Given those baseline changes the current OPEC+ plan would call for May increase of 432,000 barrels per day, Reuters reported on Monday.

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