Oil Nosedives As Analysts Have Second Thoughts About China Recovery

Meanwhile, the U.S. reports trouble in the oil patch: File Image/Pixabay

The perceived relaxation of China's zero tolerance Covid infection policy that caused a rally last week proved on Monday not to be enduring, as pessimism over the country's economic recovery from lockdowns caused a near-3.5 percent drop for a key U.S. crude benchmark.

Brent settled down $2.85, or 3 percent, at $93.14 per barrel after gaining 1.1 percent on Friday; West Texas Intermediate settled down $3.09, or 3.47 percent, to $85.87 after advancing 2.9 percent on Friday.

John Kilduff, founding partner at Again Capital, said, "The surge in COVID cases will only lead to more lockdowns in the near term...for now China is not a source of bullish support for the petroleum complex."

Ed Moya, senior market analyst at Oanda, added, "China's COVID situation is not improving and the U.S. economy appears to be quickly weakening."

Moya was referring to news that domestic oil and gas companies fracked fewer wells than they drilled for the first time in two years: the number of drilled but uncompleted oil and gas wells rose by 8 to 4,408 in October compared with the prior month, according to the Energy Information Administration, indicating a possible slowdown in production despite elevated prices and concerns about a global energy crunch.

The EIA also indicated that the industry is not achieving the same efficiency that it used to, with production per rig from new wells having fallen to the lowest levels since July 2020,

Another damper on Monday's trading was Federal Reserve governor Christopher Waller stating that there would still be some rate hikes to combat galloping inflation (although this was balanced by vice chair Lael Brainard saying it would be appropriate for the central bank to soon slow its pace).

For these and other reasons, the Organization of Petroleum Exporting Countries (OPEC) in its latest monthly report lowered estimates for the amount of crude it will need to pump this quarter by 520,000 barrels per day (bpd), following a similar-sized downgrade a month ago.

OPEC stated, "The significant uncertainty regarding the global economy, accompanied by fears of a global recession, contribute to the downside risk for lowering global oil demand growth"; but the cartel went on to note that demand will rebound in the first quarter of next year, reviving the need for OPEC's crude.

As for factors sure to influence crude trading in the days and weeks ahead, Ursula von der Leyen, president of the executive arm of the European Union, announced on Monday that the EU is "ready to go" with the imposition of a price cap on Russian oil, although a price level has not yet been decided.