China’s ‘zero Covid’ policy is likely to lead to longer lockdowns, and a slump in energy demand, just as the U.S. and allied nations release a record amount of crude into global markets.
Global oil prices slumped lower Monday as traders and investors re-set demand bets amid the ongoing Covid surge in China and the release of millions of barrels in reserves as part of coordinated plan between the U.S. and its allies to mitigate the impact of supply disruptions and sanctions on Russian energy exports.
China, the world’s biggest energy importer, could look to an extended lockdown of some of its biggest cities this week, including Shanghai, as part of its failed effort to enforce a ‘zero Covid’ policy as cases surge and hospitalizations begin to rise.
China stocks fell the most in a month, while the yield on benchmark 10-year government bond yields fell below their U.S. Treasury counterparts for the first time in twelve years Monday as investors worried about the impact of Covid policies on growth in the world’s second-largest economy.
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Traders are also adjusting for the release of 240 million barrels of crude — or more than a million barrels each day between now and the end of the year — following President Joe Biden’s decision to tap the U.S. Strategic Petroleum Reserve last month and a follow-on agreement from member states in the International Energy Agency .
“The Covid situation in China will likely have helped to ease some concerns over a tighter market, whilst the record release of oil from strategic petroleum reserves will increase supply in the coming months,” said ING’s head of commodity strategy Warren Patterson.
“In addition, the market is getting a better idea of the full impact of self-sanctioning on Russian oil supply and it seems as though it is not as severe as initially feared,” he added. “Although, this could change very quickly, particularly if the situation in Ukraine deteriorates further.”
WTI crude futures for May delivery, which are closely tied to U.S gasoline prices, were marked $4.54 lower on the session at $93.72 per barrel while Brent contracts for June, the global pricing benchmark, fell $4.40 to $98.38 per barrel.
Exxon Mobil (XOM) – Get Exxon Mobil Corporation Report shares were marked 1.7% lower in pre-market trading to indicate an opening bell price of $85.40 each while Chevron (CVX) – Get Chevron Corporation Report shares fell 1.1% to $168.08 each.
WTI has fallen around 20.5% from its early March peak of $123.70 per barrel, helping U.S. gasoline prices retreat from their record high of $4.331 per gallon last month. The AAA average was pegged at $4.114 as of Sunday.
