Oil falls as new Covid curbs in China trim demand outlook

Singapore — Oil prices fell on Tuesday as fresh Covid-19 curbs in China, the world’s biggest crude importer, and fears of a global economic slowdown weighed on the fuel demand outlook.

Brent crude futures for September fell $1.35, or 1.3%, to $105.75 a barrel by 3.05am GMT, while US West Texas Intermediate crude for August delivery was at $102.64 a barrel, down $1.45, or 1.4%.

“Growing fears of a recession and continued sluggish demand in China are pulling oil prices lower, though the current supply-demand balances remain precarious,” analysts from consultancy Eurasia Group said in a note.

A number of Chinese cities are adopting fresh Covid-19 curbs, from business halts to lockdowns, to rein in new infections as the infectious BA.5.2.1 subvariant has been detected in the country.

“While China may take a more targeted approach in trying to squash any outbreak, we will need to see how this plays out given the country’s Covid-zero policy,” said Warren Patterson, head of commodity research at ING.

“Overall, demand concerns are still driving price action. However, fundamentals are constructive, given the tight supply situation which is set to continue for at least the remainder of the year. As a result, we expect downside in prices will be limited,” Patterson said.

Western sanctions on Russia over the war in Ukraine have disrupted trade flows for crude and fuel. There have also been other curtailments of energy supply routes from Russia, a major supplier of oil, fuel and natural gas to Europe, that have traders and utilities on edge.

Worries of a disruption at the Caspian Pipeline Consortium’s system eased after a Russian court on Monday overturned an earlier ruling suspending operations at the pipeline for 30 days. However, traders and analysts remain fearful that Russia will suspend the pipeline, which carries oil from Kazakhstan to the Black Sea, potentially disrupting 1% of global crude supply.

Additionally, spare capacity at oil cartel Opec is running low with most of the producers pumping at maximum capacity. US President Joe Biden will make the case for greater oil production from Opec when he meets Gulf leaders in Saudi Arabia this week, White House national security adviser Jake Sullivan said on Monday.

The Eurasia analysts said Saudi Arabia is not expected to add significant volumes in the near term, despite Biden’s impending visit, as Riyadh will prioritise its commitment to market management and keep spare capacity for emergency losses.

In the US, crude and fuel inventories were seen down last week, while distillate stockpiles likely rose, a preliminary Reuters poll showed on Monday.

Reuters