Oil Prices Drop Amid Shanghai Lockdown, Lower Demand Concerns

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Oil prices slid Monday as China’s economic capital, Shanghai, initiated a two-stage lockdown of 26 million people to contain surging COVID-19 cases. The measure is triggering fears of lower oil demand in the biggest crude importer.

Oil Prices Dive

According to Reuters, Brent crude and U.S. West Texas Intermediate (WTI) futures dived 4.9% to $113.72 and 5.2% to $106.81, respectively, given the country’s fierce lockdowns in its zero-Covid policy.

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“Both benchmark contracts rose 1.4% on Friday, notching their first weekly gains in three weeks, with Brent surging 11.8% and WTI climbing 8.8%,” the news agency reports.

The city will be split during lockdown and will use the Huangpu River as a guide. According to Fox Business, Shanghai reported 47 new symptomatic COVID-19 cases and 2,631 new asymptomatic cases on Saturday, out of a population of 26 million.

Bjarne Shieldrop, chief commodities analyst at SEB Bank —Skandinaviska Enskilda Banken AB Class A (STO:SEB-A)— predicts that lockdowns in Shanghai could impact the country’s oil demand by 800,000 barrels per day (bpd), in comparison to normal levels.

In a note, Commerzbank AG (ETR:CBK) analyst Carsten Fritsch said that lockdowns are also “prompting growing concerns that China's strict zero-Covid policy will lead to repeated lockdowns in key business centers.”

Scraping For Oil

Reconciliation hopes between Russia and Ukraine amid possible peace negotiations have also influenced oil prices.

Kazuhiko Saito, chief analyst at Fujitomi Securities, further says the oil market could turn bullish ahead of the OPEC+ meeting on Thursday, when it will consider a 432,000 (bpd) increase in production amid supply fears.

Saito asserts the organization was “less likely to raise oil output at a faster pace than in recent months,” and it has stalled on requests to boost production to alleviate constricted crude supply.

Further, according to Reuters, OECD stockpiles are at the lowest in eight years, and, according to analysts, supply shortages are approaching as spot volumes for Russian oil will battle to find buyers next month.

“To help ease tight supply, the United States is considering another release of oil from the Strategic Petroleum Reserve (SPR), but this could be limited given already low inventories.”