Crude Oil Slumps as China Locks Down Financial Hub Shanghai

Oil prices slumped Monday after fresh Covid-19 lockdowns in China, the world’s largest crude importer, prompted fears over weaker fuel demand.

By 4 AM ET (0800 GMT), U.S. crude futures traded 3.8% lower at $109.56 a barrel, while the Brent contract fell 3.4% to $113.43.

U.S. Gasoline RBOB Futures were down 2.9% at $3.3365 a gallon.

This follows Chinese officials stating on Sunday it would lock down the financial hub of Shanghai in two stages to carry out Covid-19 testing over an eight-day period, after it reported a new daily record for asymptomatic infections.

“This action yet again highlights that China is not willing to drop its zero-covid policy and so continues to be a downside risk for the market,” said analysts at ING, in a note.

Adding to the market’s negative impulses, the leader of Yemen’s Houthi rebels on Saturday announced a three-day halt to hostilities, halting a series of missile attacks on Saudi Aramco (SE:2222) facilities in Saudi Arabia, including an oil storage site in Jeddah.

That said, the market is still on course for a fourth monthly gain, boosted by the disruption to supplies after Russia’s invasion of Ukraine prompted Western sanctions on the world’s second-largest exporter of crude, driving prices above $100 a barrel.

The crude oil market is heading into another week of uncertainty, with the Ukraine war ongoing, the Covid-19 situation in China remaining very fluid and the United States considering releasing more oil from its Strategic Petroleum Reserve to try and stem the rise in prices.

On top of this, the Organization of the Petroleum Exporting Countries and allies, a group known as OPEC+, meets on Thursday, to discuss future output levels.

“This meeting has the potential to be the most interesting so far this year,” said ING. “The group will need to decide whether they will stick to their current plan of increasing output by 400Mbbls/d per month or be more aggressive with their production hikes. OPEC+ have had more time to assess the impact of the Russia-Ukraine war and so might feel more confident to take action.”

That said, the cartel has so far resisted calls from producers, including the U.S., to further boost output, and is unlikely to do so this time round given Russia is a member and clearly has a say on what the group decides.

Data from oil services company Baker Hughes, released Friday, showed U.S. drillers added oil rigs for a 19th consecutive month but at the slowest pace since 2020 even though the government urged producers to boost output.