Oil Drops Nearly 6% as China COVID Lockdowns Impact Prices, Reports Reuters

By Stephanie Kelly

NEW YORK (Reuters) – Oil prices dropped approximately 6% on Monday, mirroring declines in the stock market, as ongoing coronavirus lockdowns in China, the largest oil importer, raised concerns about future demand.

Brent crude fell $6.45, or 5.7%, settling at $105.94 a barrel, while U.S. West Texas Intermediate crude decreased by $6.68, or 6.1%, to close at $103.09 a barrel. Despite the drop, both contracts have increased by roughly 35% since the beginning of the year.

Global financial markets are on edge due to worries about interest rate hikes and the potential for a recession. Stricter COVID-19 lockdown measures in China slowed export growth in the world’s second-largest economy during April.

"The COVID lockdowns in China are having a negative impact on the oil market, leading to a sell-off alongside equities," stated Andrew Lipow, president of Lipow Oil Associates in Houston.

In the first four months of 2022, Chinese crude oil imports were down 4.8% compared to the previous year; however, imports saw a nearly 7% increase in April. The demand for Iranian oil among Chinese independent refiners cooled from the peak levels observed in late 2021 and early 2022 due to weak fuel margins resulting from lockdowns and an increase in lower-priced Russian oil imports.

U.S. stock indexes experienced declines, and the U.S. dollar reached a two-decade high, which makes oil more expensive for foreign currency holders.

Saudi Arabia, the leading global oil exporter, has lowered crude prices for Asia and Europe for the upcoming month.

In Russia, oil production rose in early May compared to April, stabilizing after a drop the previous month due to Western sanctions imposed following the Ukraine crisis, according to Deputy Prime Minister Alexander Novak.

The European Commission recently proposed a phased embargo on Russian oil, contributing to price increases for both Brent and WTI oil for the second consecutive week. This proposal must receive unanimous approval from EU members within the week to be enacted.

To facilitate this agreement, the European Commission is considering offering additional funds to landlocked Eastern European Union states to improve their oil infrastructure, as reported by an EU source.

Bjørnar Tonhaugen, head of oil market research at Rystad Energy, noted, "The EU oil embargo will trigger a seismic shift in the European and global crude markets, which could see as much as 3.0 million barrels per day of EU crude imports from Russia cut by December 2022 if fully implemented."

Meanwhile, German officials are quietly preparing for a possible sudden halt in Russian gas supplies, which may include strategies for taking control of critical firms, according to sources familiar with the situation.

In Japan, Prime Minister Fumio Kishida announced that the country intends to ban Russian crude imports "in principle," though he acknowledged that the process would take time.