Oil drops over 4% as Covid cases force new lockdowns in China, while Russia and Ukraine talks resume
Tetra Images - Dan Bannister
- Oil was down over 4% on Monday as the Chinese financial hub of Shanghai imposed a two-stage lockdown.
- Volodymyr Zelenskyy said Ukraine is prepared to discuss neutrality in peace talks this week.
- The US said it might release more oil from its reserves as OECD stockpiles hit their lowest since 2014.
Oil fell as much as 4% on Monday as a surge in cases of Covid-19 in China result in fresh lockdowns and peace talks between Ukraine and Russia appear to show signs of progress, meanwhile the US is considering dipping into its Strategic Petroleum Reserves again.
Brent crude futures were down 3.95% at $113.42 a barrel by late morning in Europe, while West Texas Intermediate lost 4.32% to trade at around $109.58 a barrel.
Covid cases have been on the rise in China over the past two weeks and now Shanghai has launched a two-stage lockdown, starting on Monday. The lockdown will see bridges and tunnels closed, while traffic is restricted in order to contain the spread.
China is a major consumer of crude oil and the shutdown is likely to erode local demand for energy.
"This action yet again highlights that China is not willing to drop its zero-covid policy and so continues to be a downside risk for the market," ING strategists said in a note.
Elsewhere, Ukrainian president Volodymyr Zelenskyy told journalists that his country is willing to discuss neutrality as part of the peace talks with Russia, which have yet to show significant progress.
"Security guarantees and neutrality, non-nuclear status of our state. We are ready to go for it. This is the most important point," Zelenskyy said.
However, Ukraine is unwilling to discuss other demands made by Russia, such as the demilitarization of Ukraine, according to Zelenskyy. So far negotiations have centered around Ukraine staying out of NATO, disarmament and security guarantees, talks will continue in Turkey next week.
The European Union and other countries are still considering sanctions on Russia's oil exports, which could remove as much as 3% of global daily supply from the market. Some OPEC members believe Russian oil supply is irreplaceable, which was echoed last week at the FT Commodities Global Summit.
"Major oil trading companies Gunvor, Trafigura, Vitol and Mercuria seemed more or less unanimously agreeing that between 2 and 3 million barrels per day of crude and products from Russian exports will be lost to the global market," Bjarne Schieldrop, chief commodities analyst at SEB, wrote in a note.
The OPEC+ group of exporters, which includes Russia, will meet on Thursday in what could be the most interesting meeting of the year so far, according to some analysts, as the group mulls over whether or not to increase output more aggressively.
"OPEC+ have had more time to assess the impact of the Russia-Ukraine war and so might feel more confident to take action. However, we are assuming that the group will stick to the current plan. Given that Russia is a member of OPEC+, they clearly have a say on what the group decides," Will Patterson, head of commodities strategy at ING, wrote.
According to Reuters sources the US is considering releasing more oil from its Strategic Petroleum Reserve, or SPR, which could be even greater than the 30 million barrels released at the beginning of March, even though total OECD stockpiles are currently at their lowest point since 2014.
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