Global oil prices plummeted on Tuesday, continuing a recent downward momentum, and sinking below $100 for the first time in three weeks as China suffers another Covid-19 surge and reinstates localised lockdowns that will curtail demand.
Rystad Energy Senior Oil Market Analyst Louise Dickson said
the reprieve of cheaper oil could be short-lived as falling prices indicated that the market had not fully realised the potential impact of lost Russian barrels on global supply. However, she said the market was looking ahead to the two-day US Federal Reserve meeting, which is expected to see tightened policy that will strengthen the dollar and push oil prices down.
“The oil price correction from $130 per barrel to now nearly below $100 per barrel in a week’s time reflects a number of signals from the market,” Dickson said.
“China oil demand risk is real, it is estimated that a severe lockdown in China could put 0.5 million bpd of oil consumption at risk, which would be further compounded by fuel shortages due to inflated energy prices,” she said.
Dickson said the country’s zero-tolerance Covid-19 policy would be deflationary in the short term, as less money would be pumped into the economy and less oil consumed, but on a global scale it would create inflationary supply-chain issues as manufacturing and transport hubs locked down.
“China’s woes go beyond oil demand, with the Covid-19 outbreak just one among a host of threats to the Chinese economy. The housing market bubble and financial swings have long been signalling a salient risk to GDP,” Dickson said.
“Inflationary risks are persisting, especially in the energy sector, recently validated by China’s plea with refineries to suspend April’s gasoline and gasoil exports to guarantee domestic demand and quell prices. Trading is getting increasingly volatile and the dependence on algorithmic trading systems can turn a micro signal into a sweeping cascade price impact, an occurrence that is happening with increased frequency amid the fog of war and financial market uncertainty,” Dickson said.
However, the US call to ban Russian oil had so far failed.
“Without Europe pledging to cut back on its nearly 4 million bpd of Russian crude imports, the Russian supply risk that shot oil prices up towards $130 per barrel has been temporarily mollified,” Dickson said.
US inflation is also in the spotlight, and the expected decision to raise interest rates at Wednesday’s Federal Reserve had been slowly strengthening the US dollar and putting downward pressure on oil prices.
“Asia and Russia are already showing jet fuel demand distress as both have seen severe downward trends in aviation since the middle of February, Russia due to sanctions but China due to the pandemic,” Dickson said.
She added that a Chinese shift away from its zero-tolerance Covid-19 policy would signal less risk to oil consumption due to lockdowns in the short-term, and new breakouts would be less of a deflationary lever on oil prices.