Oil slumps as lockdown in Shanghai fuels fears of weaker demand

FILE PHOTO: A worker holds a fuel pump nozzle to pump gasoline into a vehicle at a gas station in Mumbai
FILE PHOTO: A worker holds a nozzle to pump gasoline into a vehicle at a gas station in Mumbai, India May 21, 2018. REUTERS/Francis Mascarenhas

March 28, 2022

By Yuka Obayashi

TOKYO (Reuters) – Oil prices fell more than $5 on Monday amid fears of weaker fuel demand in China, after financial hub Shanghai instituted a two-stage lockdown to curb a surge in COVID-19 infections.

The market began another week of uncertainty, rattled on the one hand by the war between Ukraine and Russia, the world’s second-largest crude oil exporter, and the extension of COVID-related lockdowns in China, the world’s top crude oil importer.

Brent crude futures fell as low as $115.32 a barrel and were trading up $5.15, or 4.3%, at $115.50 by 0731 GMT.

U.S. West Texas Intermediate (WTI) crude oil futures hit a low of $108.28 a barrel and fell $5.30, or 4.7%, to $108.60.

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

“Shanghai’s lockdown prompted another sell-off from disappointed investors as they expected such a lockdown would be avoided,” said Kazuhiko Saito, chief analyst at Fujitomi Securities.

Shanghai on Monday launched a two-stage lockdown in the city of 26 million, closing bridges and tunnels and restricting highway traffic in a bid to stem surging local COVID-19 cases.

Saito also said the optimistic response to a rocket attack by the Yemeni Houthis on Friday at a Saudi oil distribution facility had begun.

However, he expected the oil market to turn bullish when the Organization of the Petroleum Exporting Countries (OPEC) and its allies, known as OPEC+, meet on Thursday, as the group is “less likely to increase oil production at a faster pace than it has in recent months.”

Analysts have differing estimates of how badly Russian oil exports could be hit by economic sanctions imposed on Moscow by the United States and its allies following Russia’s invasion of Ukraine. Some suggest that 1 to 3 million barrels per day (bpd) of Russian oil may not make it to market.

Russia, which describes its actions in Ukraine as a “special operation,” exported 4.7 million bpd of crude oil in 2021, making it the world’s second-largest exporter after Saudi Arabia.

OPEC+ has so far resisted calls from major consumer nations to step up production increases. The group has increased production by 400,000 bpd each month since August to offset cuts made as the COVID-19 pandemic hit demand.

“Oil prices are likely to stay above $100 a barrel for a while as global supply only tightens as supply from Russia dwindles as the United States heads into the floatation season,” said Tetsu Emori, chief executive of Emori Fund Management .

OECD inventories are at their lowest since 2014.

To ease tight supply, the United States is considering another release of oil from the Strategic Petroleum Reserve (SPR), which could be larger than the 30 million barrel sale earlier this month, a source said.

“However, with inventories already low, there will be limited release of SPR, which is seen as another supportive factor for the market,” Emori said.

US drilling companies have added oil rigs for the 19th straight month, but at the slowest pace since 2020, despite government urging producers to ramp up production.

(Reporting by Yuka Obayashi; Additional reporting by Sonali Paul in Melbourne and Florence Tan in Singapore; Editing by Simon Cameron-Moore and Christopher Cushing) Oil slumps as lockdown in Shanghai fuels fears of weaker demand


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