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Oil drops on China COVID worries

July 11, 2022By Reuters

LONDON, July 11 (Reuters) – Oil prices fell on Monday in volatile trade, reversing some gains from the previous session as markets braced for new mass COVID testing in China potentially hitting demand, a concern that outweighed ongoing concerns about tight supply.

Brent crude futures fell USD 1.29, or 1.2%, to USD 105.73 at 0900 GMT, after climbing 2.3% on Friday. US West Texas Intermediate (WTI) crude futures declined by USD 1.78, or 1.7%, to USD 103.01, paring a 2% gain from Friday.

The market was rattled by news that China had discovered its first case of a highly transmissible Omicron sub-variant in Shanghai and that new cases had jumped to 63 in the country’s largest city from 52 a day earlier.

“The market’s just responding to news flow and China has grabbed the most attention so far,” said Commonwealth Bank commodities analyst Vivek Dhar.

Traders were nervous that the discovery of the new sub-variant and the highest number of daily new cases in Shanghai since May could lead to another round of mass testing, which would hurt fuel demand, he said..

“Net long positions in WTI crude futures are now at their lowest level since March 2020, when demand collapsed amid the initial outbreak of COVID-19. This is despite ongoing signs of tightness,” ANZ Research analysts said in a note.

The market remains jittery about plans by Western nations to cap Russian oil prices, with President Vladimir Putin warning further sanctions could lead to “catastrophic” consequences in the global energy market.

Questions also remain about how long more crude will flow from Kazakhstan via the Caspian Pipeline Consortium (CPC). Supply has continued so far on the pipeline, which carries about 1% of global oil, even after it was ordered by a Russian court last week to suspend operations.

(Additional reporting by Sonali Paul; Editing by Bradley Perrett, Christopher Cushing and Louise Heavens)

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