Oil slides as Shanghai lockdowns stoke demand fears

Oil slumped nearly five per cent to its lowest in almost two weeks on Monday, extending last week’s decline as concern grew that prolonged COVID-19 lockdowns in Shanghai and potential increases to U.S. interest rates would hurt global growth and oil demand.

In Shanghai, authorities have erected fences outside residential buildings, sparking fresh public outcry.

In Beijing many have begun stockpiling food, fearing a similar lockdown after the emergence of a few cases. 

“It seems that China is the elephant in the room,” said Jeffrey Halley, analyst at brokerage OANDA. “The tightening COVID-zero restrictions in Shanghai, and fears Omicron has spread in Beijing, torpedoed sentiment today.”

Brent crude was down $5.19, or 4.9 per cent, at $101.46 a barrel by 1145 GMT and touched $101.20 earlier in the session, its lowest since April 12. U.S. West Texas Intermediate (WTI) crude fell $4.61, or 4.5 per cent, to $97.46.

“Shanghai shows no signs of letting up its strict zero-COVID policy; instead vowing to step up the enforcement of COVID restrictions, which could hurt oil demand further,” said City Index analyst Fiona Cincotta.

Oil also weakened on the prospect of higher U.S. interest rates, which are boosting the U.S. dollar. A strong dollar makes dollar-priced commodities more expensive for other currency holders and tends to reflect increased risk aversion among investors. 

Both oil benchmarks lost nearly five per cent last week on demand concerns and Brent has retreated sharply after hitting $139, the highest since 2008, last month.

Oil gained support from tight supply. Russia’s invasion of Ukraine has already reduced supply because of Western sanctions and customers avoiding buying Russian oil, but the market could tighten further with a potential EU ban on Russian crude.

The Times reported on Monday that the bloc was preparing “smart sanctions” against Russian oil imports, citing the European Commission’s executive vice president, ValdisDombrovskis.

Outages in Libya are also lending support. The OPEC member is losing more than 550,000 barrels per day in production because of unrest, with the Zawiya oil refinery suffering damage after armed clashes. – Reuters

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