Crude Slumps on China Covid Lockdowns, Easing Supply Fears By

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By Geoffrey Smith 

-- Crude oil prices tumbled to their lowest in nearly three weeks on Tuesday as Covid-19 lockdowns in China combined with more encouraging news on the supply side to trigger more hasty selling in an overbought market.

By 11:55 AM ET (1555 GMT), U.S. crude futures were down 7.5% and $95.27 a barrel, the first time they have traded below $100 since March 1st. Brent futures, the global benchmark, were also 7.0% lower at $99.47 a barrel.

China has locked down both the megacity of Shenzhen and the northeastern province of Jilin in an attempt to bring Covid-19 outbreaks under control. The high transmissibility of the new dominant strains of the disease and the relative ineffectiveness of the Covid vaccines used by the local population mean that China’s zero-Covid policy is likely to face more such challenges before long.

The country has already cancelled thousands of flights, in addition to throttling local demand for motor fuel.

Elsewhere, the Organization of the Petroleum Exporting Countries said in its monthly report that the “latest events in eastern Europe” – the bloc is loath to criticize the war being waged by its commercial ally, Russia – also have the capacity to hurt global demand this year. Even so, the cartel stuck to its previous forecasts that demand will top 100 million barrels – above pre-pandemic levels – by the third quarter.

It also kept its forecast for U.S. shale output unchanged, further corroboration of the sector’s preference to use the current windfall gains to shore up its balance sheet.

There were also signs that big importers may be starting to overcome initial supply disruptions arising from the war. Reuters reported that India’s biggest refiner, IOC, bought 3 million barrels of Russian Urals blend crude from trader Vitol via a tender. That was its first purchase of Urals since Russia invaded Ukraine on February 24.

Indian officials have publicly mused about how to ensure constant supplies from Russia, at a time when the U.S. and EU are continually widening their sanctions packages on Russian entities, including – crucially – the banks that handle its foreign trade.

Reuters said Vitol had sold at a discount of between $20 and $25 a barrel to dated Brent, the physical benchmark.

Prices also received a knock from renewed comments by Iran and Russia talking up the prospect of a near-term deal allowing the reinstatement of the 2015 UN-backed agreement on its nuclear program. Axios reported a State Department official as saying that the U.S. wouldn't sanction trade between Russia and Iran that was explicitly allowed under the so-called JCPOA deal. However, the State Department hasn't commented publicly. 

Later, at 4:30 PM ET, the American Petroleum Institute will release its weekly assessment of U.S. oil inventories. Analysts expect the government's data, due on Wednesday, to show a drop of just under one million barrels of crude. 

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