Crude Oil Edges Higher; Focus on Chinese COVID Restrictions

Oil prices continued to rise on Tuesday, reaching their highest levels in seven weeks amid speculation that China might soon lift its COVID-19 lockdowns, potentially increasing demand from the world’s largest crude oil importer.

By 8:45 AM ET, oil futures were up 0.3% at $112.10 per barrel, while the main contract rose 0.3% to $114.62 per barrel after peaking at $115.68, its highest point since March 28. U.S. gasoline prices also saw a rise, reaching $4.0345 per gallon.

Shanghai reported that it achieved an important milestone with three consecutive days of no new COVID-19 cases outside quarantine zones, a sign that the city could soon transition to a “zero COVID” status and begin lifting restrictions. Plans were announced for the gradual easing of a lockdown that has lasted more than six weeks, with a return to more normal life expected by early June.

The stringent lockdown measures have significantly affected China’s economy, with crude processing down 11% in April compared to the previous year. However, there is growing optimism for a rebound in demand.

Despite the upward trend in oil prices, gains were tempered on Tuesday after EU foreign ministers were unsuccessful in their attempts to pressure Hungary to lift its veto on a proposed oil embargo against Russian crude. Hungary imported 70,000 barrels per day from Russia in 2021, accounting for 58% of its total oil imports, highlighting its reliance on Russian energy.

Analysts suggested that if concerns surrounding this embargo are alleviated, oil prices could revert to levels seen prior to the “war premium” resulting from the Russia-Ukraine conflict, which was around $65 per barrel of Brent.

Market attention is now focused on upcoming U.S. crude oil supply data, expected later in the day. Recent statistics indicated that inventories in the Strategic Petroleum Reserve had dropped to 538 million barrels, the lowest level since 1987, as the Biden administration seeks to enhance global supply and mitigate rising prices.

Analysts noted that the consistent withdrawal of inventories has caused U.S. gasoline stocks to fall significantly below the five-year seasonal average, indicating a tight supply situation. Meanwhile, new data revealed that U.S. oil rig counts increased by six to 563, marking the eighth consecutive week of additions.