Oil prices dipped by more than 4% early on Monday, with Brent falling below $100 a barrel, as COVID-related lockdowns in China weighed on demand expectations, while the coordinated massive release from oil reserves eased fears of supply shortages.
As of 8:05 a.m. ET on Monday, WTI Crude was down by 4.80% at $93.59, and Brent Crude was trading down by 4.50% at $98.18.
Oil prices have now erased most of their gains since the start of the Russian invasion of Ukraine, after a month and a half of extremely volatile trading in which market participants have trimmed their positions in the crude oil futures.
Oil hasn’t been this low since the middle of March. Early on Monday, the continued lockdowns in China—which is fighting its worst outbreak in two years with its zero-COVID policy—were still a source of concern for the oil market, which is apprehensive of the outlook on demand in the world’s biggest crude oil importer.
China’s financial hub Shanghai reported a record more than 25,000 new infections during the weekend. One of China’s wealthiest cities, with 26 million residents, has been under lockdown for more than a week under the Chinese “zero-COVID” policy, which could weigh on fuel demand. Authorities started easing some restrictions on Monday, as residents became increasingly frustrated with the policy.
“Weaker domestic demand suggests we should see refiners cutting operating rates, whilst there is also the potential that we see a pick-up in refined product exports from China in the short term,” ING strategists Warren Patterson and Wenyu Yao said on Monday.
Moreover, the weakening prompt time spreads in the crude oil futures structure suggest that the physical market is not as tight as what was perceived a few weeks ago.
“There are also indications that the market is looking less tight. The physical market has seen further weakness recently, whilst the prompt ICE Brent time spread has come under significant pressure in recent weeks,” ING’s strategists added.
By Tsvetana Paraskova for Oilprice.com
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It gives the lie to unsubstantiated claims that customers are shunning Russian oil exports. If this was the case, we would have seen Brent crude surging to $140-$150 a barrel. So we will lit this lie rest in peace.
However, this could also be the calm before the storm with the imminent fall of the Ukranian port of Mariupol to Russian troops. Once this is achieved, Russia will be able to link up the Crimea and Moscow-backed Donetsk and Lugansk regions. This has been the ultimate goal of Russia’s operations in Ukraine all along.
It is possible that the fall of Mariupol could see the end of Russia’s military operations and the start of peaceful negotiations to end the conflict. If not we may see again the return of the oil price premium.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London