Oil, Other Markets Plummet As Traders Fret About China's Covid Lockdowns

But one analyst says there's still not enough supply to meet demand: File Image/Pixabay

A stock market rout on Monday led to a massive drop in oil prices on Monday, as Saudi Arabia lowered its crude prices in a sign of flagging demand due to China's Covid lockdowns.

The rout was also said to be caused by the European Union compromising some of its proposed sanctions against Russia.

West Texas Intermediate plummeted $6.68 to settle at $103.09 per barrel, while Brent nosedived $6.45 to settle at $105.94 per barrel.

China's crude imports in the first four months of 2022 fell 4.8 percent from a year ago - although they were up nearly 7 percent in April, something that apparently didn't impress jittery traders.

This resulted in Saudi Aramco dropping its key Arab Light grade for next month's flows to $4.40 per barrel above the benchmark and Andrew Lipow, president of Lipow Oil Associated, said, "The Covid lockdowns in China are negatively impacting the oil market, which is selling off in conjunction with equities."

As for the bans on Russia, according to documents seen by media, the EU will drop a proposed ban on its vessels transporting Russian oil to third countries but retain a plan to prohibit insuring those shipments.

Rohan Reddy, director of research at Global X Management, said, "The less-prohibitive sanctions plan on Russian oil may take less of its supply offline and highlights the complexity of sanctions against Russian energy."

Alexander Schallenberg, minister for foreign affairs for Austria, said, "I can assure you that Europe will move out from Russian oil and Europe will move out from Russia gas; the only thing is it cannot be done overnight."

Regardless of when the EU bans will begin and what form they take, analysts regard them as a game changer for the global energy market.

Bjørnar Tonhaugen, head of oil market research at Rystad Energy, said, "The EU oil embargo will trigger a seismic shift in the European and global crude markets, which Rystad Energy expects could see as much as 3 million barrels per day of EU crude imports from Russia cut by December 2022 in a full-fledged implementation of the policy."

Finally, trading in wider markets on Monday was also affected by the Federal Reserve's aggressive rate hike strategy, but Reddy emphasized that oil will continue to be "range bound because there's still not enough supply for the market currently; barring a major Covid-19 spread, a supply shortfall will still exist."