Oil Tumbles Anew as China’s Covid Bogeyman Returns

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By Barani Krishnan

AiVIF.com -- If Vladimir Putin and OPEC are oil bulls’ best friends, you can count on China and the Federal Reserve for having the back of the bears.

In a way that’s become quite predictable these days, China’s Covid bogeyman pops up after crude prices have stacked up double-digit gains to announce new social curbs in the world’s largest oil importer. 

So was the case on Tuesday as Shanghai and other big Chinese cities, including Shenzhen, ramped up testing as coronavirus infections rose, with some local authorities hastily closing schools, entertainment venues and tourist spots. 

The result: a 3% tumble in crude prices since this week began, after last week’s 17% run-up.

New York-traded West Texas Intermediate crude settled down $1.78, or 2%, at $89.35, extending Monday’s 1.6% slide. The U.S. crude benchmark rose 17% through last week, registering a powerful start for October, after a 12.5% drop in September and 24% loss for the third quarter.

Brent oil settled Tuesday’s session down $1.90, or 2%, at $94.29 per barrel, after a 1.8% slide in the previous session. Brent rose 11% last week, making up all of September’s loss and recovering partially from its 22% loss in the third quarter.   

China’s Covid cases have risen to their highest since August, with the uptick coming after increased domestic travel during the National Day "Golden Week" earlier this month, Reuters reported, as authorities reported 2,089 new local infections for Oct. 10 alone — the most since Aug. 20.

Shanghai, a city of 25 million, said it had 28 local cases for Oct. 10, the fourth day of double-digit increases. It will conduct mass testing at least twice a week until Nov. 10, a step up from once a week, to avoid a reprise of its economically and psychically scarring lockdown in April-May.

While Chinese authorities often have statistics to justify the new curbs and lockdowns, to those on the risk side of markets, especially in oil, the popular thinking is that the largest oil importer had much to gain from keeping crude prices down.

"From an economic perspective, it seems like China's throwing the baby out with the bathwater by continuing to lock down its population to lower cases,” John Kilduff, partner at New York energy hedge fund Again Capital, was quoted saying. 

Oil import quotas for China, released on Monday, weren’t helpful either in reigniting last week’s rally.

This week’s slump in oil also came on the back of new shudders introduced into the market by Fed policy-makers.

Cleveland Fed President Loretta Mester warned on Tuesday that a potential shock could tip the U.S. economy into recession.

Her caution came on the heels of the stance by Fed Vice Chair Lael Brainard on Monday that U.S. monetary policy will have to be restrictive in the near term as policy tightening will take time to produce results against inflation.

“I see a limited second-half GDP rebound, with GDP growth remaining flat this year,” Brainard said, appearing on a live-streamed discussion about the economy.

World Bank President David Malpass and International Monetary Fund Managing Director Kristalina Georgieva added to market caution when they warned on Monday of a growing risk of global recession and said inflation remained a continuing problem.

Market participants were also on the lookout for U.S. weekly oil inventory data, due after market settlement from API, or the American Petroleum Institute.

The API will release at approximately 4:30 PM ET (20:30 GMT) a snapshot of closing balances on U.S. crude, gasoline and distillates for the week ended Oct. 7. The numbers serve as a precursor to official inventory data on the same due from the U.S. Energy Information Administration on Wednesday.

For last week, analysts tracked by AiVIF.com expect the EIA to report a crude stockpile build of 1.75 million barrels, versus the 1.36-million barrel reduction reported during the week to Sept. 30.

On the gasoline inventory front, the consensus is for a draw of 1.825 million barrels over the 4.728 million-barrel decline in the previous week.

With distillate stockpiles, the expectation is for a drop of 2.05 million barrels versus the prior week’s deficit of 3.44 million.