Crude Oil Lower; Rising Shanghai COVID Cases Prompt Lockdown Fears

© Reuters.

By Peter Nurse

AiVIF.com -- Oil prices weakened Monday after Shanghai discovered the first case of a highly infectious COVID-19 variant, raising concerns about demand from the world’s largest importer of crude.

By 09:20 AM ET (1320 GMT), U.S. crude futures traded 1.7% lower at $103.06 a barrel, while the Brent contract fell 1.6% to $105.35.

Both benchmarks posted weekly declines last week, following on from the first monthly decline since November, on fears that aggressive interest rate hikes would spark a recession and dent oil demand.

U.S. Gasoline RBOB Futures were down 1.2% at $3.4055 a gallon.

Adding to the concerns Monday was the news that Shanghai city authorities identified over the weekend a new sub-variant of the now-dominant BA.5 Omicron strain, and that the risk of transmission in the city was high. 

The number of Chinese living under COVID-19-related restrictions rose to over 114 million, according to Nomura, and most of Shanghai’s districts are being subjected to three days of mass testing this week.

"We expect COVID restrictions, mainly in the form of rolling mini-lockdowns for the rest of the year, which would be less disruptive to production or supply chains, along with the gradual rollout of more supportive policies," UBS said, in a note.

However, it has brought back memories of the prolonged lockdowns that paralyzed China’s financial hub for months earlier in the year, causing a severe drop in the demand for crude.

Away from China, attention is on the European energy markets as the Nord Stream 1 pipeline began a period of scheduled maintenance on Monday, meaning that there is now virtually no Russian gas flowing to Europe's largest market. 

While the move was notionally routine, it has raised fears that Gazprom (MCX:GAZP), the Russian state-owned energy giant which runs the pipeline, will refuse to bring it back online at the end of the period, deepening Europe's energy crisis.

The week’s other major event sees U.S. President Joe Biden traveling to Saudi Arabia, where he is expected to press for an increase in oil production from the main player in the Organization of Petroleum Exporting Countries cartel.

“These talks will require the American party to demonstrate its diplomacy skills – Saudis are the only large oil producer with enough available productive capacity,” said Andrey Goilov, a trader for RoboForex. “The talks aren’t expected to be easy – the US will have to offer something to spark Saudi Arabia’s interest.”