Brent Crude falls sharply on China lockdown factor

It is said that when it comes to oil prices, nothing spooks the oil market more than contraction in demand. That was visible in full flow on Monday 28th March after China announced a series of lockdowns in Shanghai to curb the spread of the COVID virus.

The situation got a little complicated as Shanghai happens to be the financial and business capital of China. Not surprisingly, oil prices cracked nearly 7% on Monday.
 
Brent has had a volatile movement in the last few weeks. Two weeks back, Brent had moved all the way to a 14-year high of $139/bbl on fears that Russian oil sanctions would crimp the supply in the oil market.

However, with EU refusing to join in the sanctions, the price of oil fell all the way to $100/bbl. In the last few days it had recovered back to $120/bbl levels but the latest China scare led to Brent crude falling by $8.17, or 6.8% to $112.48 per barrel.

Check - Brent Crude crosses $110/bbl on Ukraine worries

The WTI crude also showed a roughly similar pattern. The reason was a two-stage lockdown in Shanghai almost shutting out 26 million people. The idea was to curb the spread of COVID-19 as China continued to remain steadfast on its Zero tolerance policy.

Most of the bridges and tunnels were closed while the highway traffic was restricted. Oil analysts are worried that the lockdowns could spread combined with a long liquidation.

The fears are not hard to fathom. China is the largest importer of crude and it imports close to 8 lakh barrels per day. Meanwhile, as demand in China raises some concerns for oil, the focus shifts to Turkey where the peace negotiations between Russia and Ukraine are expected to start next week.

That is likely to be the next big trigger. Meanwhile, the focus is also on the OPEC meeting where it is expected to increase output by 432,000 bpd.
 

Experts are of the view that Russia supply was not impacted as most of them were already contracted ahead of the conflict. The real picture will only be out when there is renewal of such contracts. That is when the surplus 7% of world output from Russia will start showing on the prices.

Early indications are of a supply deficit as the Russia April crude is finding tough to contract buyers. Clearly, few oil importers want to rub the US the wrong way.

Russian crude still has substantial buyers. For instance, India and China are still buying Russian crude in large quantities while the Indonesian state energy company, PT PERTAMINA, is also likely to consider buying Russian oil.

More so, since the Russian oil is available at a discount of 20% to 25% to the market price. With OECD stockpiles at their lowest, not too many countries are keen on disrupting the flow of supply in the market.

For now, the focus would be on whether the lockdowns in China spread beyond Shanghai. Meanwhile, the US is planning to release oil from its Strategic Petroleum Reserve (SPR).

However, the real game of oil would be eventually played out between Chinese demand and Russian supply triggers. Either one of these factors will predominate in the coming days to determine the direction of crude oil prices.