Oil Sinks Under The Weight Of China Lockdown Fears

However, the European Union may cause sentiment to return to supply fears: File Image/Pixabay

In the tug of war between fear of demand destruction due to the China Covid lockdowns and fear of high demand and short supply thanks partly to Russia/Ukraine, China on Tuesday dominated trading behaviour - and oil prices sank.

On the strength of news earlier this week that China oil demand is down more than 1 million barrels per day (bpd) year-to-date, West Texas Intermediate settled down $2.76 to $102.41 per barrel; Brent settled down $2.61 to $104.97.

However, as the European Union spends most of this week developing a proposal to gradually ban Russian oil by the end of the year, prices for natural gas and coal on Tuesday increased by over 6 percent.

Hans van Cleef, a senior energy economist at ABN Amro Bank, remarked that "A possible oil ban could have an impact on the gas markets," and he added that Russia has previously indicated it could retaliate by cutting gas flows from the Nord Stream pipeline to Germany.

Hoping to ward off an overseas energy crisis, the U.S. is shipping more crude to Europe than ever: it was reported on Tuesday that in April American producers exported nearly 50 million barrels of crude to European buyers from terminals in Texas and Louisiana: that's nearly half of what was sent overseas last month from the Gulf Coast, the main U.S. export hub.

The shipments to Europe last month included three Very Large Crude Carriers for the first time in monthly data.

As for the effectiveness of existing bans against Russia, is seems India and China may soon become the only nations to continue doing business with the former Soviet Union: Bloomberg on Tuesday reported that a recent attempt by ONGC Videsh to sell Sokol, Russian crude typically favored by Asia buyers, resulted in zero bids, and the failure follows a similar pattern to Russia's Urals crude, which has been deeply discounted yet is struggling to attract buyers.

Bloomberg stated, "At this point, it's unclear what ONGC Videsh will do with its unsold Sokol cargo."

While Tuesday's roller coaster trading is rapidly becoming the norm for the crude market, Bernard Looney, CEO of BP, told media that it could be here to stay: "We've got low-ish stocks around the world, we've got low-ish spare capacity around the world and have a lot of uncertainty; all of these things lead to a lot of volatility and we can expect that volatility to continue."

Rebecca Babin, senior energy trader at CIBC Private Wealth Management, added, "Crude is trading sideways as we await further details from the EU on what an Russian oil ban will look like."