Oil drops as Shanghai shutdown bolsters fears over weak 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

TOKYO (Reuters) – Oil prices fell more than $3 on Monday as concerns grew about weak fuel demand in China after its financial hub in Shanghai launched a planned two-phase shutdown on Monday to contain a surge in coronavirus infections.

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 $3.09, or 2.6%, at $117.56 at 0340 GMT.

US West Texas Intermediate crude futures recorded a low of $109.30 a barrel, and fell $3.28, or 2.9%, to $110.62.

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.

Shanghai’s financial hub on Monday launched a planned two-phase shutdown of the city of 26 million people, shutting bridges and tunnels and restricting highway traffic in a scramble to contain rising local COVID-19 cases. Read more

Saito said the optimistic reaction to a missile attack by Yemeni Houthis on a Saudi oil distribution facility ended on Friday. Read more

But he expected the oil market to turn bullish when the Organization of the Petroleum Exporting Countries (OPEC) and its allies, known as OPEC+, meet on Thursday, as the group was “less likely to increase oil production at a faster pace than in recent months.”

Analysts have varied estimates of how severely Russian oil exports are affected by the economic sanctions imposed by the United States and its allies on Moscow in the wake of the Russian invasion of Ukraine. Some believe that one to three million barrels per day of Russian oil may not reach the market.

Russia exports between 4 million and 5 million barrels of crude oil per day, making it the second largest exporter in the world after Saudi Arabia.

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

“Oil prices are likely to stay above $100 per barrel for a while, as global supplies will get tighter with lower supply from Russia while the US heads into the driving season,” said Tetsuo Emori, CEO of Emori Fund Management Inc.

Global inventories are at their lowest levels since 2014.

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

“But given the already low stocks, there will be a limited release of the Strategic Petroleum Reserve, which is seen as another supportive factor for the market,” Emory said.

US rigs added oil rigs for the 19th consecutive month but at a slower pace since 2020, despite the government’s urging for producers to increase production.

Additional reporting by Sonali Paul in Melbourne. Editing by Cynthia Osterman, Jacqueline Wong and Simon Cameron-Moore

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