Crude Prices Nosedive As Extent Of Lockdown Induced Economic Damage In China Is Revealed

Meanwhile, the EIA cuts estimates for domestic oil production in 2023: File Image/Pixabay

Adding to the frustration of world players who think oil prices don't reflect tight fundamentals, crude on Wednesday once again tumbled on fears of reduced demand in China due to state-mandated Covid lockdowns.

West Texas Intermediate's 50-day moving average also fell below its 200 day moving average (known as a "death cross") for the first time since the height of the pandemic in 2020.

WTI dropped $4.94 to settle at $81.94 per barrel, and Brent sank $4.83 to settle at $88 per barrel.

China's obsession with achieving zero Covid infection rates has resulted in mobility restrictions for an estimated 65 million people, and Fenglei Shi, a Beijing-based director covering Chinese oil markets at S&P Global Commodity Insights, noted that although the next two months are usually a busy period for travel due to two national festivals, "We expect that gasoline, diesel, and jet fuel demand over September and October will continue to fall short of pre-Covid levels."

According to that country's transportation ministry, traffic congestion in Chinese cities dropped at the end of August, while the number of trucks on  highways had fallen to 6.4 million on Sept. 4 versus 7.3 million a month before; plus, the number of daily flights plunged 41 percent in the week through Aug. 28 compared with the same period in 2019.

But despite the economic chaos incurred by Chinese cities from Chengdu to Shenzhen extending lockdowns or restricting movement, U.S. demand remains strong, and this encouraged analysts to evaluate if crude could fall much further.

Ed Moya, senior market analyst at Oanda Corp., said, "WTI crude should hold $80 given how strong the U.S. economy remains and now that most of the demand shock from China's deteriorating COVID situation has been priced in."

Still, the worry remains that central banks increasing rates to mitigate inflation may result in recession and slow demand – and as Clay Gaspar, COO of Devon Energy, pointed out on Wednesday, the volatility of the oil market also makes completing acquisitions especially hard to do.

Meanwhile, the U.S. Energy Information Administration in its monthly report cut its forecast for domestic oil production in 2023 to 12.63 million barrels per day (bpd) compared to an earlier estimate of 12.7 million; it also expects annual petroleum usage globally to rise roughly 2 million bpd through next year.

The EIA for a third month also lowered its 2022 output forecast to 11.79 million bpd compared with a prior estimate of 11.86 million.