Oil Dips As Shanghai Returns To Lockdown, But Bull Market Remains Invincible

Meanwhile, analysts warn that high gas prices could trigger a recession: File Image/Pixabay

Renewed lockdowns in Shanghai under China's zero-Covid infection policy caused analysts on Thursday to resume worrying about impacted demand, and as a result oil prices slipped - albeit minimally.

After news broke that Shanghai will lock down a district on Saturday for mass testing, West Texas Intermediate dipped 60 cents to settle at $121.51 per barrel, and Brent dropped 51 cents to settle at $123.07 per barrel.

Some insiders welcomed the decline: "Crude futures are also in an overbought condition and a corrective phase is definitely due," said Dennis Kissler, senior vice president of trading at BOK Financial, and he added that "Prices have to take a breather at some time and the new possible Covid issues in China are assisting this morning."

Still, the situation in China could best be described as in flux: when the government curbs were lifted earlier, May exports jumped 16.9 percent from a year earlier, the fastest growth since January this year and more than double expectations.

Few if any analysts think Thursday's losses are anything but a small, temporary blip. Francisco Blanch, head of global commodities and derivatives research at Bank of America Corp., told media that oil prices haven't yet peaked: "The crisis in the oil market hasn't arrived yet."

Blanch went on to state that, "Despite all the pain we're seeing at the pump…the U.S. is so much better off than anyone else" due to an extremely strong dollar.

When asked what he thought a crisis would look like, Blanch replied that oil could rise as high as $150 per barrel and that the crisis could be "a multi-year issue" if the Russia/Ukraine war doesn't soon resolve.

Blanch's remarks about the U.S. being better off than other countries notwithstanding, Harrison Fell, senior research scholar at Columbia University's Center on Global Energy Policy, pointed out that "I don't think many economists would argue sustained $5 gas prices would have minimal effects; I think most of us would agree sustained prices that high with no other policy intervention would be a drag on the economy, [and] whether or not it's sufficient to tip us into a recession is a bit of an unknown factor."

However, economists also note that a strong job market and high wages are a buffer against the high prices and make the current situation far different than in 2008: Michelle Meyer, Mastercard's chief economist, U.S., said, "While there's clearly a shock, and there's a strain on consumer budgets, the good news is there is support from the healthy labour market and the amount of excess savings that are still outstanding; in 2008 there was zero savings" and the U.S. plunged into a recession.

Plus, demand is stronger than ever: Thomas Saal, senior vice president at StoneX Financial, noted  that "Even though prices are higher, we haven't seen any sizable drop in demand yet….that may happen any day now, but people are still driving."