Oil takes a nose dive amid Covid demand fears as China locks down Shanghai

The Covid supplanted Monday the Russia/Ukraine war as the main motivation for a massive drop in oil prices, traders once again concerning this ChinaThe reinstatement of containment measures (due to its zero-tolerance infection policy) could hurt demand.

After authorities announced that Shanghai – population 25 millions people – will take turns locking down half the city for mass Covid testing, West Texas Intermediate fell $7.94 settle at $105.96 per barrel, and Brent fell by $8.17 settle at $112.48 per barrel.

It has been said that a pause in hostilities by Yementhe Houthis against Saudi Arabia also contributed to Monday’s sale.

Andy Lipowpresident of Lipow Oil Associatesnoted, “China’s oil demand is about 15 million barrels per day [bpd]; the scale of the selloff reflects fears that China’s Covid shutdowns could spread, significantly affecting demand at a time when the oil market is trying to find alternatives to Russian oil supplies.”

The impact to date of the backlash against Russia’s invasion of Ukraine has been revealed on Monday, when it was revealed that the country’s average daily oil exports had reached 495,300 tons, down 26.4% from the previous week, according to figures seen by Bloomberg.

According to the data, the decline in exports was at least partly due to lower volumes from Russian ports on the Baltic sea and in the Asia Pacific Region; but total oil production over the period was little changed, falling 0.3% of the previous week.

Kremlin spokesman Dmitry Peskov told the media on Monday that “undoubtedly the drop in requests will be compensated by requests from the East; it cannot be ruled out that some volumes will be lost, but in any case , the global market is more multifaceted”.

Monday also saw the revelation of another problem for an oil market struggling with extreme volatility: hedging.

Specifically, Jay Stevensvice president of AEGIS coverage solutions, reported that some hedging transactions that previously took four to six weeks to complete now take three months or more, and “Now it costs 25 percent more on average to hedge using banks and 50 percent more if you use a merchant trader to cover you, so the cost of execution has increased quite steeply.”

He added: ‘It’s still worth the hedge, but we definitely have producers who are unhappy with it’; Indeed, since most traders will not move physical barrels without a corresponding financial exchange to help minimize risk, these mismatches in the financial trading space are likely to spill over into physical markets.

As for the near-certain influencers of the oil trade in the coming days, Yeah Jun Rongmarket strategist at GI, Noted that “the next OPEC [Organization of the Petroleum Exporting Countries] The reunion will also be watched this week, which could likely see a low-key response from the group to the current geopolitical tensions, as members may stick to its current production schedule of a 400,000 bpd increase in oil supplies.

“If true, it could help support oil prices and further support the upside.”