Oil drops over China COVID lockdowns concerns and Fed rate hikes cause demand worries
Wang Gang/Future Publishing via Getty Images
- Oil slipped on Monday as China tightened lockdowns and conducted mass-testing to control a COVID-19 outbreak.
- The Federal Reserve's signal that it may raise rates quickly prompted fears of a hit to economic growth.
- Brent crude oil fell 4.76% to $101.10 per barrel, while WTI crude futures slid 4.78% to $97.18 a barrel
Oil dropped for a second day on Monday, as China's efforts to contain an outbreak of COVID-19 and the Federal Reserve's indication that it could raise interest rates aggressively prompted concerns about demand.
Brent crude oil slid 4.76% to $101.10 a barrel and WTI crude oil slipped 4.78% to $97.18 a barrel, dropping for a second day.
China implemented harsher measures to contain rising COVID cases in the country, which has raised fears of a big hit to demand in the world's biggest energy importer. Shanghai authorities put up fences by some residential buildings and closed some streets amidst a strict lockdown in the financial hub, with fears of a lockdown in capital Beijing following mass testing.
Chinese officials have stood by what they're calling a "dynamic" "zero-COVID" policy. That means rapid lockdowns, mass testing, and travel restrictions whenever clusters emerge, with Shanghai locked down since March.
A raft of Fed officials, including Chair Jerome Powell last week, have signaled the central bank is likely to raise US interest rates by half a percentage point next month to bring inflation, which is running at its hottest in over 40 years, under control. Investors largely expect the Fed to raise rates by 50 basis points at its next three policy meetings and there is a growing risk that this could hurt economic growth.
"There is little doubt that worries about falling demand in China is hitting traders sentiment, coupled with an expected slowdown in the US," said Susannah Streeter, senior investment and markets analyst at Hargreaves Landsdown. "However the price is set to stay volatile given the brutal ongoing battles in Ukraine are adding to the spring tides of worry."
The oil market has already faced reduced supply after Russia's war on Ukraine. Russia was heavily sanctioned following the invasion, as traders shun Russian cargo and the EU mulls a Russian energy cut, after the US already banned it.
The European Union was planning "smart sanctions" on Russia's oil imports, the Times reported Monday, to minimize damage to the bloc's economy. The EU is heavily dependent on Russia for its energy needs, with around 25% of its oil and 40% of its natural gas imports coming from there, and is under pressure to find alternative sources.
"Russia's commitment to waging war in the East of the country remains unwavering and there is still some expectation that European countries which are still holding out against a Russian crude embargo, may relent in the face of Moscow's continuing aggression," Streeter said.
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