Oil Nosedives Over Covid Demand Fears As China Locks Down Shanghai

Meanwhile, Russia exports plummet by over 26 percent: File Image/Pixabay

Covid on Monday supplanted the Russia/Ukraine war as the main motivator for a massive drop in oil prices, with traders once more concerned that China's reinstatement of lockdowns (due to its zero-tolerance infection policy) could harm demand.

After authorities announced that Shanghai – population 25 million people - will lock down half of the city in turns for mass Covid testing, West Texas Intermediate fell $7.94 to settle at $105.96 per barrel, and Brent nosedived by $8.17 to settle at $112.48 per barrel.

It was said that a pause in hostilities by Yemen's Houthis against Saudi Arabia also contributed to Monday's sell off.

Andy Lipow, president of Lipow Oil Associates, remarked, "China oil demand is approximately 15 million barrels per day [bpd]; the magnitude of the selloff reflects fears that Covid lockdowns in China could spread, significantly impacting 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 invading Ukraine was revealed on Monday when it was disclosed that the country's average daily oil exports reached 495,300 tons, down 26.4 percent from the week before, according to figures seen by Bloomberg.

According to the data, the decline in exports was at least partly driven by lower volumes from Russia's ports on the Baltic Sea and in the Asia-Pacific region; but total oil production over the period was little changed, dropping 0.3 percent from the week before.

Kremlin spokesman Dmitry Peskovtold media on Monday that "Undoubtedly, declining 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 multi-faceted."

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

Specifically, Jay Stevens, vice president at AEGIS Hedging Solutions, reported that some hedging deals that used to take four to six weeks to transact are now taking three months or more, and "Now it costs 25 percent more on average to hedge using banks and 50 percent more if you are using a merchant trader to hedge, so the cost of execution has gone up pretty heavily."

He added, "It's still worth putting on the hedge but we definitely have producers that are unhappy about it"; that's because since most traders won't move physical barrels without a corresponding financial trade to help minimize risk, these mismatches in the financial trading space risk spilling into physical markets.

As for near-certain influencers of oil trading in upcoming days, Yeap Jun Rong, market strategist at IG, noted that "The upcoming OPEC [Organization of the Petroleum Exporting Countries] meeting will also be on watch this week, which may likely see a muted response from the group to current geopolitical tensions, as members may stick to its current production schedule of a gradual 400,000 bpd increase in oil supplies.

"If it holds true, it may aid to underpin oil prices and support further upside."