Oil Dips But Holds Well Above $120 Amid New China Lockdown Scare

© Reuters.

By Barani Krishnan

AiVIF.com -- China has new Covid scares. But they aren’t enough to unnerve the long oil crowd — not yet at least.

Shanghai and Beijing went back to fresh coronavirus alerts on Thursday after parts of China's largest economic hub imposed new lockdown restrictions and announced another round of mass testing for millions of residents, Reuters reported.

Both cities had recently eased heavy curbs on activity aimed at discouraging the spread of the virus, even as China itself had stuck with a "dynamic zero-Covid" policy.

Shanghai residents, in particular, are on edge as new cases flare with the end of the city's grinding two-month lockdown. Officials on Thursday said they had traced three infections to the Red Rose, a popular beauty salon in central Shanghai that reopened when the rest of the city did on June 1.

The most populous district in Beijing meanwhile, announced the shutdown of entertainment venues, while news of the lockdown of Shanghai's Minhang district, home to more than 2 million people, pulled down Chinese stocks, Reuters added.

But none of the negative news had much of an impact on oil prices.

London-traded Brent, the global benchmark for crude, settled down just 51 cents, or 0.4%, at $123.07 a barrel. 

On Wednesday, Brent hit  $124.38, its highest since 14-year peaks of above $130 reached on March 9 after the invasion of Ukraine that triggered Western sanctions on Russian oil that upended the global energy market. The global crude benchmark is up 58% so far for this year.

West Texas Intermediate, the New York-traded benchmark for U.S. crude, settled down 60 cents, or 0.5%, at $121.51 per barrel, after a three-month high of $123.15 on Wednesday. Year-to-date, the U.S. crude benchmark is up more than 61%.

“The oil market remains very tight, but the short-term crude demand outlook took a bit of a hit today,” Ed Moya, analyst at online trading platform OANDA, said, citing the roadblock to China’s reopening with potential lockdowns in seven cities, as well as the growing threat of stagflation in the United States.

Moya, however, said whatever weakness in crude now would be limited by demand generated by U.S. summer travel.

“This will be one of the busiest driving seasons ever. The pent-up demand for vacation and travel will be front-loaded and demand for crude will be robust even if gas prices make a move towards $6 a gallon.”

The pump price of gasoline has hit a national average of more than $5 a gallon for the first time ever in the United States, tracking service GasBuddy said Thursday in its latest update on the dramatic increase in fuel prices for Americans amid inflation running at 40-year highs.

GasBuddy’s quoted prices for gasoline were slightly higher than that of the American Automobile Association, or AAA, which on Thursday was still reporting a national average of $4.97.

Both services, however, indicated that pump prices had been rising virtually non-stop this year, with AAA saying that they rose 25 cents in the week to June 6, almost 60 cents from a month ago, and over $1.80 from a year earlier.

Crude prices have risen every month since November as most world economies began rebounding strongly from the 2020 coronavirus outbreak. The Russia-Ukraine conflict since February, and subsequent sanctions by the West on major energy exporter Russia, have also severely reduced the supply of most energy commodities, taking their prices to multi-month or multi-year highs.

In the United States, the crisis has taken on an added dimension with the closure and downsizing of several refineries during the pandemic that has led to an even more drastic squeeze on the supply of gasoline and diesel — the main fuel that trucks, buses, trains and vessels run on.

According to industry estimates, more than 1.0 million barrels per day of US oil refining capacity — or about 5% overall — has shut since the COVID-19 outbreak initially decimated demand for oil in 2020.

Analysts say US refineries in operation now are providing only what they can — or, more accurately, what they desire — without putting additional money into expanding existing capacity or acquiring idled plants that can be reopened to provide measurable relief to consumers. One motivation for refineries to behave so: record profits from the current situation that may be diluted in an expansion. The other is the long turn-around time for any new refinery to deliver a profit.