Crude Oil Declines; China’s COVID Lockdowns Impact Demand

By Peter Nurse

Oil prices experienced a decline on Monday, influenced by concerns regarding lower demand from China, the world’s largest crude importer, as the country continues to deal with a prolonged COVID-19 outbreak.

As of 9:15 AM ET, oil futures were down 1.5% at $108.16 per barrel, while Brent crude fell by 1.3% to $110.91 per barrel. U.S. gasoline prices also saw a slight decrease of 0.2%, trading at $3.7508 per gallon.

In response to the ongoing pandemic, China’s two major cities, Beijing and Shanghai, have implemented stricter COVID-19 restrictions, significantly curtailing the movement of residents. This contrasts with many other countries that have moved towards reopening.

Despite a nearly 7% increase in crude oil imports in April compared to the same month last year, this marked China’s first rise in three months. Overall, imports during the January-April period dipped by 4.8% year-on-year.

Saudi Arabia, the leading oil exporter globally, has reduced crude prices for Asia and Europe for June, signaling anticipated weak demand.

Analysts from ING noted that “lockdowns in China have weighed on domestic fuel demand, likely affecting refinery operations, which would subsequently lower crude oil demand.”

Additionally, the oil market faced downward pressure from the strengthening U.S. dollar, which reached a two-decade high, making oil pricier for international buyers.

Notably, crude prices remain high, with benchmark contracts up over 40% for the year. The ongoing conflict in Ukraine has contributed to supply tightness as nations look for alternative energy suppliers, while the Organization of the Petroleum Exporting Countries has taken a cautious approach in restoring supply after pandemic-era cuts.

The European Union is nearing an agreement on a sixth package of sanctions against Russia, following a proposal for a phased embargo on Russian oil. This measure requires unanimous approval from EU members, but resistance has emerged from countries heavily reliant on Russian energy, such as Hungary, Slovakia, and the Czech Republic.

ING mentioned that the EU has adjusted its ban proposal to ease the transition for these nations. Under the revised plan, Hungary and Slovakia would have until the end of 2024 to reduce their dependence on Russian oil, while the Czech Republic would have until June 2024. However, these concessions have not satisfied Hungary, which continues to obstruct the ban.

Additionally, over the weekend, the Group of Seven major industrial nations reached an agreement to impose a similar ban on Russian oil imports.