Oil Dips on Gloomy Consequences Of China's Zero Tolerance Covid Policies

Meanwhile, OPEC forecasts an expansion of its global market share: File Image/Pixabay

After five months in the doldrums, oil on Monday was on track to post a rare monthly gain even though it incurred a round of daily losses, as demand concerns due to China's zero Covid tolerance policy continued to clash with the reality of an extremely tight global supply.

Early in the session, Chinese government figures showed that factory and services activity contracted in October, and this was followed by Vitol Group stating that it was seeing signs of oil demand destruction as Chinese cities increased their Covid curbs.

Stephen Innes, managing partner of SPI Asset Management, said, "The purchasing managers' index (PMI) data contracting adds to the post-China congress party blues for oil markets….it is not difficult to draw a straight line from weaker PMIs to China's COVID-zero policy.

"So long as COVID-zero remains entrenched, it will continue to thwart oil bulls."

All this led to West Texas Intermediate for December delivery falling $1.37 to settle at $86.53, while Brent for December settlement, which expired on Monday, dropped 94 cents to $94.83 per barrel (the more active January contract fell 96 cents to settle at $92.81).

Russell Hardy, chief executive officer at Vitol, said of banks around the world hiking rates to tame inflation, "It remains painful, it remains difficult for many countries…. as a result, we're going to continue to see demand destruction for another few months."

The impending energy crunch in Europe also weighed heavily on traders: Monday saw the launch of the Adipec oil and gas conference in Abu Dhabi, in which Claudio Descalzi, CEO of Eni SpA, told delegates that Europe will have to rely on the U.S. to make up for the loss of Russian oil supplies from next year.

At the same time, the energy envoy of U.S. president Joe Biden, who aggressively curtailed his country's output ability when he first came into office, said that current U.S. investment in new energy supply is not adequate.

Biden followed up on Monday by vowing to call on Congress to consider tax penalties for oil and gas companies accruing record profits, according to a White House official; the penalties could include a so-called windfall profit tax, which Democrats have been proposing for more than a decade without success.

Meanwhile, the Organization of Petroleum Exporting Countries (OPEC) stated in its annual World Oil Outlook that global demand will continue to grow for at least another decade, by 13 percent to reach 109.5 million barrels per day (bpd) in 2035, at which stage it will hold at this level for another 10 years.

OPEC, which has been accused of lowering its output by 2 million bpd in order to improve the bottom line of its ailing members, noted that it in light of the demand growth it would be "potentially dangerous" to completely abandon fossil fuels.

OPEC also sees its share of global oil supply (currently at 31 percent) expanding over the next two decades as output from rivals ebbs: total crude oil and other oil liquids output from its 13 members will climb from last year's level of 31.6 million bpd to 38.3 million bpd in 2035 and keep rising to reach 42.4 million per day a decade later.