As a wave of turmoil swept across China, risk assets were punished, and the future for energy consumption was obscured. This added to the pressures in an already unstable global crude market, which caused oil prices to plummet to their lowest level since December.
After suffering losses for three weeks in a row, the price of a barrel of West Texas Intermediate fell below $74. Protests against strict anti-virus measures broke out over the weekend across the world’s largest crude importer, including protests in Beijing and Shanghai, which prompted a widespread selloff in commodities as the new week began. The unprecedented act of defiance has increased the likelihood of retaliation from the administration.
The disturbance contributed to an increase in the value of the dollar as a safe haven, decreased the desirability of raw materials, and hampered travel in China. With the number of instances of Covid-19 reaching a record high this month, it raises the potential that authorities will respond by implementing stricter controls.
The recent decline in the price of oil is just the most recent event to take place in what has been a turbulent year, with price volatility being pushed by the conflict in Ukraine, aggressive central bank tightening to battle inflation, and China’s relentless measures to remove Covid-19. Diplomats from the European Union have been engaged in discussions on a price ceiling for Russian crude oil for the past few days, and those discussions are scheduled to get back up later on Monday.
According to Warren Patterson, head of commodities strategy at ING Groep NV in Singapore, “Sentiment in the oil market remains bearish, and developments over the weekend in China would likely not help,”
According to data provided by Baidu, the amount of congestion that occurred during the peak hours of traffic in key Chinese cities on Monday morning was significantly reduced. Traffic was down 45% from the previous year in Beijing, the capital city, while it was down 35% in Guangzhou, the largest city. According to Kpler, a data and analytics company, the amount of oil that China would require could average 15.11 million barrels per day during this quarter. This number is down from 15.82 million barrels per day a year earlier.
As a result of an increase in lockdowns, “demand forecast will worsen before it gets better,” according to Fenglei Shi, director of Greater China oil market midstream and downstream at S&P Global Commodity Insights.
Aside from China, traders were also evaluating a move by the United States to grant the supermajor Chevron Corp. a license to resume oil production in Venezuela. Sanctions had halted all drilling activities in Venezuela almost three years ago, and now the US is considering granting this license to Chevron. The easing of sanctions comes after Norwegian mediators stated last weekend that they will be restarting political discussions between President Nicolas Maduro and the opposition.
The most important market metrics are pointing to worsening situations. WTI’s prompt spread, which is the gap between its nearest two contracts, was 17 cents a barrel in a bearish contango pattern, whereas a month ago it was $1.29 a barrel in backwardation.
Since the beginning of the pandemic, China’s strategy for combating the spread of Covid-19 has been based on massive vaccinations, mass testing, and lockdowns of public spaces in an effort to contain outbreaks. This has resulted in a decrease in the demand for energy and has led to a buildup of discontent regarding the limits as other nations have begun to open up. In spite of the complex set of criteria, the number of virus cases reached an all-time high this month.
In Europe, members of the EU have not been able to come to an agreement on how stringent the price restriction that is being led by the Group of Seven should be on Russian oil. Poland and the Baltic nations have raised objections to a suggestion for a cap of $65 per barrel, arguing that it would be too generous to Moscow. However, shipping nations like Greece want a higher threshold. Russia has declared it will block oil sales to anyone involved.
When the value of the US dollar rises, the cost of goods that are priced in the currency rises as well, making imports more expensive.
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