China's Covid Concerns Continue To Weigh On Oil Prices

• Oil prices initially extended their gains early on Monday morning on renewed hopes that economic activity in China would recover.
• That movement higher was only brief, however, as a strong U.S. dollar and reports of record-high Covid cases in major Chinese cities sent prices falling.
• While the lifting of restrictions in China will certainly limit downside fears, Covid will continue to cause problems in China over winter.

Crude oil began trade today with a gain on the resurgence of hopes that Chinese demand is about to enter recovery mode.

The hopes followed announcements from China that some pandemic restrictions will be relaxed.

The gains, albeit modest, reflect a reversal in market sentiment, which just last week led to a second consecutive weekly oil price decline on expectations that pandemic restrictions in China will continue to affect economic activity and with it oil demand for longer, as infections continued multiplying.

The situation remains uncertain because Covid cases are on the rise in the world’s top oil importer.

"The market was too optimistic. The virus will spread faster in winter and the rapid growth of cases makes it impossible for the Chinese government to adjust the zero-COVID policy," Reuters quoted a CMC Markets analyst as saying.

“This policy pivot will help limit downside fears of a protracted restrictive approach to on-onshore activity, but it doesn’t eliminate the immediate demand hit from current lockdowns,” said SPI Asset Management’s head of trading and market strategy Stephen Innes in a note cited by Reuters.

Dutch ING noted in another note that the relaxation of certain restrictions was “a step in the right direction” but added that the market would take time to be convinced that this step is enough to sustain optimism about prices.

Meanwhile, U.S. Treasury Secretary Janet Yellen signaled that the U.S. would not penalize India for buying Russian crude outside the price cap devised by the G7, as long as Indian buyers refrain from using Western insurance, financing, and shipping services, which are all covered by the cap scheme.

Yellen also suggested that China would benefit from the price cap despite repeated signals from Beijing that it was not interested in taking part in the mechanism.

“We see the price cap is something that benefits China benefits India, and benefits all purchasers of Russian oil," Yellen said.

By Irina Slav for Oilprice.com

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