Oil falls as Shanghai shutdown raises concerns about lower demand

A worker holds a nozzle to pump gasoline into a car at a gas station in Mumbai, India, May 21, 2018. (Reuters) / Frances Mascarenhas

MELBOURNE/TOKYO (Reuters) – Oil prices fell nearly $4 on Monday as concerns grew about slowing fuel demand in China after authorities in Shanghai said they would shut down the country’s financial hub for COVID-19 testing over a nine-day period.

The market has begun another week of uncertainty, as the ongoing war between Ukraine and Russia, the world’s second-largest crude exporter, and the expansion of COVID-related shutdowns in China, the world’s largest crude importer, have begun. Read more

Brent crude futures fell to $116.00 a barrel and traded as low as $3.88, or 3.2%, at $116.77 at 0131 GMT.

US West Texas Intermediate crude futures recorded a low of $109.30 a barrel, and fell $3.92, or 3.4%, to $109.98.

Both benchmark contracts rose 1.4% on Friday, posting their first weekly gains in three weeks, with Brent up more than 11.5% and WTI up 8.8%.

“The Shanghai shutdown led to fresh selling from investors who were frustrated because they had been expecting to avoid such a shutdown,” said Kazuhiko Saito, chief analyst at Fujitomi Securities Co., Ltd.

He added that the market had taken into account the impact of a missile attack on a Saudi oil distribution facility last Friday.

“However, since it is unlikely that OPEC+ will increase oil production at a faster pace than in recent months, we expect the oil market to turn bullish again later this week,” he said.

Shanghai’s city government said Sunday that all businesses and factories will suspend manufacturing or make people work remotely in a two-phase shutdown over nine days, after the city reported a new daily record of asymptomatic COVID-19 infections. Read more

Resulting in increased demand for fuel, public transportation, including transportation services, will also be suspended during the lockdown.

Yemen’s Houthis said on Friday they had launched attacks on Saudi energy facilities, and the Saudi-led coalition said Aramco’s petroleum products distribution station in Jeddah had been bombed, causing a fire in two tanks, but there were no casualties. Read more

The Organization of the Petroleum Exporting Countries (OPEC) and its allies known as OPEC+ are due to meet on Thursday.

OPEC+ has so far resisted calls from major consuming countries, including the United States, to increase production. The group has been raising production by 400,000 barrels per day each month since August to ease cuts made when the COVID-19 pandemic hit demand.

To help ease the supply tightness, a source said, the United States is considering another demobilization of oil from the Strategic Petroleum Reserve that could be larger than the sale of 30 million barrels earlier this month.

“The additional release, however, may cause shortage concerns in already low stocks which will limit further release in the future,” said Fujitomi’s Saito.

Global inventories are at their lowest levels since 2014.

Editing by Cynthia Osterman and Jacqueline Wong

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