By Barani Krishnan
Investing.com — China’s “rule by law,” where the legal system is used to exercise government will or make changes to just about anything at anytime, was at the oil market’s forefront again Monday as Beijing’s attempts to convey a more flexible attitude towards Covid juxtaposed with an explosion in new infections from the virus.
Crude prices tumbled more than 3% on the day, exhibiting again the volatility that has frustrated oil bulls so much since last month, after OPEC’s bid to bring a barrel closer to $100 with the sharpest production in two years was watered down by one lockdown after another under a zero-Covid policy in China — the world’s largest oil importing nation.
New York-traded , or WTI, for delivery in December settled down $3.09, or 3.5%, at $85.87 per barrel — wiping out Friday’s 3% rally spurred by a move to reduce the quarantine period for travelers in China and the scrapping of a major restriction on international flights. WTI ended last week down 6.6% after prior back-to-back wins of 5% and 3.5% in two prior weeks.
London-traded settled down $2.85, or 3%, at $93.14. The global crude benchmark fell nearly 3.5% last week after gains of about 3%, 2.5% and 2% over three prior weeks.
China reported 14,288 Covid cases on Saturday alone, up from a nationwide tally of 11,323 on Friday. Daily cases have stayed above 10,000 since breaching that level last week for the first time since April. Guangdong, Henan, Beijing, Chongqing and Inner Mongolia remain the provinces or municipalities with the most outbreaks.
“China just relaxed some pandemic measures, but experts suggest ‘Zero-COVID’ probably won’t be going away anytime soon,” Time magazine said in a focus piece.
Matthew Bossons, a Shanghai-based editor and journalist who has lived in China since 2014, concurred, saying: I’ve had dozens of nucleic acid tests, canceled a domestic work trip and seen multiple colleagues hauled off to quarantine hotels or locked down at home. (On Friday, China announced limited easing of some measures — though no mention of when the changes would take effect.)
Bossons said students in many cities in China are back to remote learning. “My 5-year-old daughter is on her second week off school after her kindergarten closed due to restrictions related to Covid-19. At this point, she has spent more time at home in 2022 than in the classroom.”
He also said restrictions at a moment’s notice have made it nearly impossible to plan more than 20 minutes ahead of time. “This is bad for business, of course, but it also affects ordinary people’s ability to go about their lives — you never know when you might get locked down in your apartment, workplace, a local mall or even Shanghai Disneyland.”
China is the world’s largest importer of crude: last year, it imported 11.8 million barrels per day, outpacing the United States, which takes in 9.1 million barrels per day.
Back in May, as both WTI and Brent hovered above $100, the rally in oil came to a screeching halt after Beijing adopted a zero-Covid strategy and announced strict containment measures that included major lockdowns. The restrictions also had a severely negative impact on Chinese consumer demand and manufacturing output.
Leon Li, a Shanghai-based analyst at CMC (NS:) Markets, however, said the oil market had been “too optimistic” lately over China’s reported reopening from lockdowns.
“The virus will spread faster in winter and the rapid growth of cases makes it impossible for the Chinese government to adjust the zero-COVID policy,” Li added. “Moreover, it will take some time from the release of the policy to its implementation, so China’s full liberalization may have to wait until the first quarter of next year, which means that the rebound of oil prices last Friday is unsustainable.”
China’s demand for oil from the world’s top exporter, Saudi Arabia, also remained weak as several refiners have asked to lift less crude in December.
“The latest easing in quarantine requirements is certainly a step in the right direction, but the market will likely need to see further easing if this recent enthusiasm is to be sustained,” ING said in a note.
OPEC on Monday cut its forecast for 2022 global oil demand growth for a fifth time since April and further trimmed next year’s figure, citing mounting economic challenges including high inflation and rising interest rates.
Oil demand in 2022 will increase by 2.55 million barrels per day (bpd), or 2.6%, down 100,000 bpd from the previous forecast, the oil-producing group said.
“The world economy has entered a period of significant uncertainty and rising challenges in the fourth quarter of 2022,” OPEC, known in full as the Organization of the Petroleum Exporting Countries, said in its monthly report.
“Downside risks include high inflation, monetary tightening by major central banks, high sovereign debt levels in many regions, tightening labor markets and persisting supply chain constraints.”
A firmer dollar also pressured oil as trading began for the week.
The , which pits the greenback against the euro, yen, pound, Canadian dollar, Swedish krona and Swiss franc, was up 0.4% Monday, climbing for only the third time in 10 sessions. Last week, the greenback-driven index tumbled 4.1%, its most since a weekly drop of 4.8% in March 2020.
Completing a perfect storm for oil bulls was the Energy Information Administration’s update on U.S. drilling on Monday, which projected the Permian Basin, the most prolific U.S. shale patch, will hit record high output in December.