Oil slides as new Covid lockdowns in China spark demand fears

Singapore — Oil prices slipped on Friday but remained within touching distance of three-month highs as fears over new Covid-19 lockdown measures in Shanghai outweighed solid demand for fuels in the US, the world’s top consumer.

Brent crude futures for August were down 77c, or 0.6%, at $122.30 a barrel at 4.48am GMT after a 0.4% decline the previous day. US West Texas Intermediate crude for July fell 72c, or 0.6%, to $120.79 a barrel, having dropped 0.5% on Thursday.

Still, with prices overall rallying in the past two months, Brent was on track for a fourth consecutive weekly gain and WTI was set for a seventh straight weekly increase. Both benchmarks on Wednesday marked their highest closes since March 8, the highest settlements in 14 years.

“Shanghai’s new pandemic restrictions raised concerns over demand in China,” said Kazuhiko Saito, chief analyst at Fujitomi Securities.

“But losses were capped by expectations that tight global supply will continue with solid US demand for fuels and slow increase in crude output by Opec+,” he said.

Shanghai and Beijing went back on a fresh Covid alert on Thursday after parts of China’s largest economic hub imposed new lockdown restriction and the city announced a round of mass testing for millions of residents.

“We were just starting to get optimistic about Chinese demand with lifting of restrictions in Shanghai and Beijing, and the latest move to lock down certain regions in Shanghai for mass testing is a reminder that there is no change in China’s Covid policy,” said Madhavi Mehta, commodity research analyst at Kotak Securities.

“If it continues to use restrictions to limit the spread, economic activity may be impacted.”

China’s crude oil imports rose nearly 12% in May from a low base in a year earlier, though refiners were still battling high inventories with Covid-19 lockdowns and a slowing economy weighing on fuel demand last month.

Meanwhile, peak summer fuel demand in the US continues to boost crude prices.

“The summer driving season in the US is seeing record surges in petrol and diesel consumption, although comparable surges in pump prices, next to low stocks, point to a market vulnerable to supply disruption and concerns about a sharp drop-off in demand, once peak demand season fades,” analysts at Fitch Solutions said in a note.

The US and other nations have engaged in a series of releases of strategic reserves, but these have had limited effect, with global crude supply rising slowly.

Reuters