Oil Drops Again On China Demand Concerns As India Posts Record Fuel Consumption

OPEC suggests the market is being driven by "non fundamental factors": File Image/Pixabay

China's zero Covid infection tolerance policy has forced millions of people to be locked down in that country with no indication of the virus abating – and this in turn caused yet another big drop in oil prices on Monday.

West Texas Intermediate fell $3.97 to settle at $94.29 per barrel, while Brent fell $4.30 to settle at $98.48 per barrel.

But even though oil's war-driven rally is reportedly teetering on the brink of oblivion, on Monday the Organization of the Petroleum Exporting Countries (OPEC) said it would be impossible to fully replace barrels lost to sanctions against Russia, and that the market could experience a loss of as much as 7 million barrels per day (bpd).

Mohammad Barkindo, secretary general for OPEC, said his group didn't have the capacity to replace the barrels; he also noted that markets are being swayed by political factors rather than supply and demand: "These crises have compounded to create a highly volatile market; I must point out, however, that these are non-fundamental factors that are totally out of our control at OPEC."

Still, analysts believed China's lockdowns would go a long way in alleviating concerns over a tight market: John Kilduff, founding partner at Again Capital, remarked that the lockdowns are "truly changing the calculus of the market that was so worried about the sufficiency of supply out of Russia," and he added that combined with the release of more strategic reserves from the U.S. and members of the International Energy Agency, "it's really taken a lot of the supply fears out of the market."

Kilduff's view was supported by data showing that a weakening structure in the futures curve in recent days suggests diminishing concerns about a lack of sufficient supply.

As for the impact of the China lockdowns, Eurasia Group estimated that the closure of Shanghai alonelikely reduced China's overall oil consumption by up to 1.3 million bpd.

The organization added that, "Even when the restrictions in Shanghai are lifted, China's zero-Covid policies will likely remain a drag on demand."

But any claims of demand weakening should be taken with a grain of salt: for example, fuel demand in India rose 4.2 percent to a three year high in March, and gasoline sales hit an all-time peak at 2.91 million tonnes from a year earlier, according to data from the Petroleum Planning and Analysis Cell of that country's oil ministry.