Oil prices drop on lower demand from top crude importer China

China, the world's manufacturing hub, likely to continue with its zero-Covid policy

Traders work on the floor of the New York Stock Exchange. Oil market participants will be keenly following the Group of Seven's implementation of a price cap on Russian oil. AFP
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Oil prices were down on Monday following a sharp drop earlier in the session, after strict Covid-19 curbs affected China’s crude demand in September.

Brent, the benchmark for two thirds of the world’s oil, and West Texas Intermediate, the gauge that tracks US crude, fell more than 2 per cent in the afternoon. Brent was down 0.65 per cent at $92.89 a barrel, while US crude futures were 0.81 per cent lower at $83.46 a barrel, as of 8.05pm UAE time.

China, both the world’s second-largest economy and biggest crude importer, brought in 40.24 million tons of crude oil, or about 9.79 million barrels per day, in September.

Crude shipments were up from 9.5 million bpd in August, but were well below the 10 million bpd China imported a year earlier, data from the country's General Administration of Customs show.

The country’s gross domestic product grew 3.9 per cent year-over-year in the third quarter, a sharp rise from the 0.4 per cent growth reported in the second quarter.

Industrial production in September rose 6.3 per cent, compared to 4.2 per cent in August, signalling an improvement in manufacturing output last month.

“Oil prices settled mixed last week as the negative prospects for demand remain powerful as indicated by China’s insistence on using a zero-Covid policy,” Edward Bell, senior director of market economics at Emirates NBD, said in a research note on Monday.

Xi Jinping, who has backed the government’s zero-Covid policy, secured a third term as China's president on Sunday, cementing his position as the nation's most influential leader since Mao Zedong.

Oil markets are closely watching how a price cap on Russian oil will be enacted by the Group of Seven nations. The cap, which is meant to reduce revenue for Russia’s government, is expected to come into effect on December 5.

A European Union embargo on Russian waterborne crude will be enacted the same day, while a ban on refined products will take effect on February 5.

Crude supply has been tight after the Opec+ alliance of oil-producing countries slashed its collective output by two million bpd earlier this month.

Brent crude, which has gained about 11 per cent over the month, will see “strong” resistance going into the $93-$95 a barrel range as recession expectations could “jeopardise any strong oil rally into the $100 level”, said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.

Recent data has pointed to a nascent recovery in the US shale patch.

Oil production in the Permian Basin of Texas and New Mexico, the biggest shale basin and the focal point of the US shale resurgence, is expected to rise by about 50,000 barrels per day to a record 5.45 million bpd in November, the country's Energy Information Administration said last week.

Updated: October 24, 2022, 4:29 PM