Oil Prices Fall 4% Due To Prolonged Covid Restrictions In China

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Oil prices fell by 4% to a two-week low. The drop extends last week’s losses on fears that the resurgence of COVID-19 in China and possible rate hikes in the U.S. will hurt global demand.

Oil Prices Plunge

According to Reuters, Brent oil for delivery in July maintains its downward trend Monday and is already trading below $102 a barrel, a decrease of more than 4% compared to Friday’s close. This is due in part to prolonged Covid-related restrictions imposed in Shanghai.

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Meanwhile, North Sea oil, Europe's benchmark, already posted losses last week ending around $105. West Texas Intermediate (WTI) crude oil futures also fell more than 4% to $97.60 a barrel, —below the $100 barrier and at their lowest since April 11.

The market remains aware of the war in Ukraine, as well as the quiet economic activity in China as a result of the restrictions imposed by new outbreaks.

Shanghai authorities have imposed draconian measures to combat the resurgence of the virus, which keep the city's population at home and put pressure on crude oil prices and also on the region's stock markets.

Economic Impact

Main stock markets in China have reported falls of between 4% and 6% due to concerns about economic growth.

Link Securities analysts say the intention of Chinese authorities to prolong and even reinforce the restrictive measures to combat the new wave of the pandemic is affecting many regions and a significant part of the country's large cities, including Shanghai.

“The communist government of China continues to bet on its ‘Covid-zero’ strategy to try to control the expansion of the Omicron variant, a strategy that is clearly not working and that, on the contrary, can cause a significant economic loss for the country,” they added.

Shanghai's GDP grew in the first quarter but was well below that of China as a whole (3.1% compared to 4.8%). This demonstrates the massive impact these measures have had on the economic growth of one of the most prosperous cities in the country, according to the same firm.

Further, oil prices are forecast to be affected by the a possible interest rate hike in the U.S., after the Federal Reserve said the central bank is considering an increase by half a point at its meeting on May 4.