Oil edges lower on demand concerns as China continues with 'zero-Covid' strategy

Potential interest rate hikes planned by the US Fed have also affected crude prices

Oil demand for the year has been lowered by 260,000 barrels per day from last month's projection to 99.4 million bpd for 2022, the International Energy Agency said earlier this month. EPA

Oil dropped nearly 5 per cent on Monday to its lowest in almost two weeks, as demand concerns grew because of strict Covid-19 movement restrictions in China, the world’s biggest importer of oil, and potential US rate hikes that could affect economic growth and crude consumption globally.

Brent, the global benchmark for two thirds of the world's oil, was trading 4.30 per cent lower at $102.06 per barrel at 2.57pm UAE time on Monday, while West Texas Intermediate, the gauge that tracks US crude, slipped below $100 and was down 4.39 per cent, at $97.59 a barrel.

“Oil prices are in a sharp decline mainly due to growth concerns,” said Naeem Aslam, chief market analyst at Avatrade.

“It seems that a lot of hot air is coming out of the oil rally that we experienced in the past weeks and now the uptrend is facing a major threat.”

China, the world’s second-largest economy, is experiencing a wave of Covid-19 infections and has introduced strict movement curbs in Shanghai, its largest city, to control the spread of the pandemic. New cases have also been detected in China’s capital Beijing as the government continues to carry out mass testing to isolate every infected person as part of its “zero-Covid” strategy.

Earlier this month, the International Energy Agency cut its demand forecast for 2022 due to Covid-19 lockdowns in China and weaker-than-expected demand growth in advanced economies, especially the US.

Demand for the year has been lowered by 260,000 barrels per day from last month's projection to 99.4 million bpd for 2022, the Paris-based agency said.

Opec, representing some of the world’s top oil producers, also lowered its supply and demand forecasts, in its monthly market report, over concerns that the Russia-Ukraine war and lockdowns in China could stymie consumption.

“Oil remains choppy with China and the Fed creating a bit more two-way price action amid very tight markets,” said Craig Erlam, senior market analyst for the UK and EMEA [Europe, Middle East and Africa], at Oanda.

“The risks are certainly more tilted to the upside, given the war in Ukraine and a potential embargo on Russian exports, but lockdowns in China and the risk of a Fed-driven economic slowdown are also significant.”

The US, the world’s largest economy, is tightening monetary policy and considering half-point interest rate increases to tame inflation, Federal Reserve chairman Jerome Powell has said. The development is expected to boost the US dollar and make dollar-priced commodities more expensive for countries that hold other currencies.

“Hawkish central banks, a stronger dollar and an uncertain demand outlook in China are all weighing negatively on the near-term outlook for oil prices,” Emirates NBD said in a note on Monday.

Oil prices rose close to $140 per barrel last month because of supply concerns as Russia intensified its military offensive in Ukraine. Russia is the world's second-largest energy exporter, accounting for about 10 per cent of global energy output, including 17 per cent of natural gas and 12 per cent of oil supplies. The US and UK have already banned Russian oil imports.

Supply disruptions from Libya are also supporting oil prices. The north African country closed its ports as well as some oilfields amid political turmoil in the country.

“I am sensing a possible turn in sentiment in oil markets now, because two ostensibly bullish headlines have been completely ignored by Asian markets in a world where crude supplies are supposedly very tight,” said Jeffrey Halley, Oanda's senior market analyst for the Asia Pacific.

He said Europe may be preparing “smart sanctions” on Russian energy imports, which could be bullish for oil prices, as reported by Reuters. A major Libyan oil terminal has also sustained heavy damage during recent clashes that support oil prices, he added.

Last week, Libya’s National Oil Corporation shut down its Zueitina oil port in the north-east of the country and its Al Sharara oilfield and spoke of “the start of a painful wave of closures” as political turmoil continues. It also closed its Brega oil port.

Libya, which has largely sweet oil, has had much of its production remain offline during the civil war that erupted between factions after the downfall of former Libyan leader Muammar Qaddafi in 2011.

The country has had two competing governments since March and these rival administrations could herald a return to division and instability, the UN said last month.

Libya, an Opec member, produces about 1.2 million barrels of oil a day and is exempt from the Opec+ production deal because of security concerns.