Expanded China Lockdown And Russia-Ukraine Prospects To Further Weigh On Oil

Key Highlights

• China’s extension of its COVID lockdowns to Shanghai will hit its oil imports
• Analysts say Chinese oil demand could weaken by 0.8 million bpd in April
• Signs of less onerous Russian ceasefire demands are also bearish for oil 

A widening out of China’s COVID lockdowns continues to hang over oil prices, as FX Empire predicted would be the case after the first recent wave of lockdowns less than a week ago. Economic powerhouse city, Shanghai, with a population of of 26 million people, has now been placed in a two-stage lockdown.

China remains the largest annual gross crude oil importer in the world, having surpassed the US in this regard in 2017, and became the world’s largest net importer of total petroleum and other liquid fuels in 2013, according to EIA data.

The economy-crimping effect of the current lockdowns may be exacerbated by further lockdowns in the coming weeks due to Beijing’s ‘zero-Covid’ strategy.

“Demand [for oil from China] will likely weaken by 0.8 million barrels per day [bpd] in April versus normal due to ongoing lockdowns which may affect more than 200 million people,” according to Bjarne Schieldrop, chief commodities analyst at SEB bank, in Oslo.

Although China has slightly moderated this ‘zero-Covid’ strategy – to allow for daily increases in symptomatic cases to be capped at around 200 on a national basis – this adjustment is insignificant, given that it is currently seeing the largest wave of COVID infections since Wuhan in early 2020.

Support From Russian Oil Ban May Be Short-Lived

Some analysts expect oil price support to come from the loss of Russian crude oil from the market due to US-led sanctions on it as a result of its invasion of Ukraine.

“At the FT Commodities Global Summit last week the major oil trading companies Gunvor, Trafigura, Vitol and Mercuria seemed more or less unanimously agreeing that between 2 and 3 million bpd of crude and products from Russian exports will be lost to the global market,” said Schieldrop.

Other market commentators, however, believe that comments last week by Russian Deputy Prime Minister, and former Energy Minister, Alexander Novak, and supported by China and India, mean that the impact on Russian crude oil flows will be limited.

Specifically Novak said: “New challenges linked to supply chain disruptions, the insurance of ships that transport our products, and with issues of financing and payment…but these issues are being resolved at the moment…and customers are happy to buy it [Russian crude oil].”

Russia Moderating Ceasefire Demands On Ukraine

Adding to the possibility of further bearish pressure on oil prices is news from several sources that Russia is no longer requesting Ukraine be ‘de-nazified’ and is prepared to let the country join the European Union, provided that it does not attempt to join NATO, as part of ceasefire negotiations.