Oil prices swing amid worsening Ukraine crisis, Libya output halt and China's Covid curbs

Protests in Libya have led to oilfield closures in the country, while pandemic-related restrictions in China weighs on demand outlook

A pump jack in Emlichheim, Germany. Oil prices rose on Monday as the Russia-Ukraine conflict is intensifying. EPA

Oil prices continued to swing on Monday as investors weighed growing supply concerns amid crude production halting in Libya and the increasing likelihood of stiffer western sanctions on Russian oil exports against the impact of continued Covid-19 lockdowns in China on global oil demand.

Brent, the global benchmark for two thirds of the world's oil, which has been fluctuating in the $110.71 to $113.80 range on Monday, rose 0.22 per cent to $112 a barrel at 2.48pm UAE time. West Texas Intermediate, the gauge that tracks US crude, climbed 0.13 per cent to $107.01 a barrel.

Both gauges rose during early trade, rallying on from Thursday when Brent gained 2.68 per cent and WTI surged 2.59 per cent, to record their first weekly gain this month.

Libya's National Oil Corporation (NOC) was forced to declare force majeure and shut down its Zueitina oil port, including all fields and producing stations associated with the port and shipping facilities, on Monday, due to political protests.

Force majeure points to an unforeseen set of circumstances preventing a party from fulfilling a contract.

NOC was also forced to shut down its El Feel oilfield in the south-west of the country on Sunday, after a group of individuals entered the site on Saturday and prevented employees from working.

The company has further warned of a "painful wave of closures at the time of the oil and gas price boom".

"Oil prices initially gapped up in the week’s opening trade on the back of reports of Libyan oil disruption and Russia’s warning of higher oil prices," Vijay Valecha, chief investment officer at Century Financial, said.

"Two Libyan ports have been forced to stop loading oil after protests against the prime minister."

Although only 75,000 bpd barrels per day of actual production was taken offline with the shutdown of El Feel oilfield, "with global supplies now so tight, even the most minor disruption is likely to have an outsized impact on prices", said Jeffrey Halley, senior market analyst, Asia Pacific at Oanda.

The worsening situation in Ukraine, with Russia bombarding several cities and talks between Kyiv and Moscow at a dead end, have also raised the prospects of tougher sanctions on Russian energy exports in an already tight market.

Reports before the Easter holidays suggested that the EU was considering plans to cut Russian oil imports in a phased manner to give Germany and others time to line up alternative suppliers for their energy needs.

Supply has also been affected as some Opec countries struggle to hit production quotas.

Total Opec crude production averaged 28.56 million bpd in March, up 57,000 bpd from the previous month. Output increased mainly in Saudi Arabia, Kuwait and the UAE, while production declined in Libya, Nigeria and Congo, Opec data based on secondary sources revealed.

“There are a few reasons behind today’s rise. Opec reported that production rose only 57,000 barrels per day in March according to data, not even climbing by the agreed 253,000 bpd,” Mr Halley said.

“The Russian Interfax agency said Russian production slipped by 7.5 per cent in the first half of March.”

Russia's oil supply is expected to decline further as sanctions by the US and its allies due to the Ukraine conflict take effect, according to the International Energy Agency (IEA). About 1.5 million bpd of production is expected to be offline in April, the agency said.

From May, close to 3 million bpd of Russian production could be shut in due to international sanctions and as a widening customer-driven embargo comes into full force, the IEA said last week.

Russia is the world's second-largest energy exporter and accounts for about 10 per cent of global energy output, including 17 per cent of its natural gas and 12 per cent of its oil. The US and UK have already banned Russian oil imports.

The oil market has remained tumultuous since Russia’s war in Ukraine started in late February. Brent price, which rose 67 per cent last year, climbed to a notch under $140 per barrel in March. It fell briefly under the $100 per barrel mark after a co-ordinated release of record oil inventories by the IEA and the US from emergency stockpiles, but recovered quickly.

Brent is still more than 40 per cent higher since the start of this year but the continued lockdown in China, the world's biggest oil importer, is weighing on demand outlook. The Chinese economy showed signs of softening in March as consumption, real estate and exports were affected due to pandemic-related restrictions and a slowdown in its export markets due to the Ukraine war. Retail sales in the country fell 3.5 per cent annually in March, the first contraction since 2020.

"Going ahead, energy markets are going to see active positioning by both long and short participants," Mr Valecha said.

"Bears are increasingly going to make their case on the back of the ongoing Shanghai restrictions, likely leading to demand downfall. China’s zero Covid policy is seeing the country lock down a city three times the population of New York City."

With so much volatility in intraday oil prices, and "extreme reactions to headline risks", technical levels have become rather irrelevant in oil trading, Mr Halley said.

“I continue to expect that Brent will remain in a choppy $100 to $120 range, with WTI in a $95 to $115 range. Brent crude has further support at $96 and WTI at $93 a barrel.”

Gold prices also gained on Monday to their highest level since mid-March as the Ukraine crisis boosted its safe haven demand. Spot gold was up 0.75 per cent at $1,988.8 an ounce at 10.32am UAE time.

The rise on Monday comes after a second straight weekly gain for gold.