Oil prices surge as China starts easing Covid-19 restrictions

Brent and WTI rally as the world's largest oil importer aims to gradually reopen Shanghai by June

Pump jacks extract oil in Denver City, Texas, US. Oil continues to rise on supply concerns and higher demand. Bloomberg

Oil prices rallied on Tuesday, in anticipation of higher demand as China — the world’s largest importer of crude — began easing coronavirus-related restrictions.

This follows a decline China's Covid-19 infections, which has seen Shanghai, its largest city and trade hub, placed under strict lockdown.

Brent, the global benchmark for two-thirds of the world's oil, was trading 1.13 per cent higher, at $115.57 a barrel at 3.56pm UAE time on Tuesday. West Texas Intermediate, the gauge that tracks US crude, was up 0.94 per cent at $115.27 a barrel.

"Oil prices have remained near multi-week highs this week, supported by surging gasoline and distillate prices in the US, and fears around an EU ban on Russian oil imports remaining in play," said Jeffrey Halley, senior market analyst with Asia Pacific at Oanda.

He said if markets start pricing in post-lockdown Shanghai, "that will be an additional supportive tailwind for oil prices”.

Shanghai reported no new Covid-19 cases for the third consecutive day on Tuesday. The city is expected to reopen gradually with the resumption of transport services later this month, which could boost oil demand.

The eastern city of 26 million inhabitants had been under lockdown for more than a month, as the world’s second-largest economy follows a “zero-Covid” strategy to stem infections.

"With oil prices now at or above their recent range highs, the question becomes just how much further they'll go and how uncomfortable it's going to get," said Craig Erlam, senior market analyst for the UK and Emea, at Oanda.

"The next test for Brent is $120 but let's face it, a full reopening in China and an EU embargo could see prices rise much further."

Oil, which rose to nearly $140 a barrel in March, after Russia invaded Ukraine, has been trading lower in the past few weeks. This came amid demand concerns, owing to movement restrictions in some Chinese cities. Brent is up by more than 40 per cent since the start of the year.

Supply is also tightening in the oil market as the EU, which is heavily dependent on Russia's energy resources, presses ahead to work out a ban on Russian oil imports.

Russia accounted for about 45 per cent of EU gas imports and close to 40 per cent of its total gas consumption in 2021, figures compiled by the International Energy Agency show.

There is also a growing concern over the lack of capacity to produce more oil due to lower investments in the energy sector, amid the pandemic.

“At a time like this, we need more excess capacity to give people the comfort that they have the ability to say that we have a contingency,” Saudi Arabia's energy minister Prince Abdulaziz bin Salman told an energy conference in Bahrain on Monday, calling for more investments.

The total investment in the upstream sector of the oil and gas sector fell 23 per cent below pre-coronavirus levels to $341 billion in 2021, the International Energy Forum and IHS Markit said.