DTN Oil

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and the Brent contract on the Intercontinental Exchange were down modestly in early trading Monday, with both crude benchmarks trading near two-month lows after China reported several COVID-related deaths in some of the country's largest cities, prompting return of mass testing and harsh lockdowns.

Surging COVID-19 infections are threatening to overwhelm some of China's largest cities, according to media reports, with health officials stymied over how to control infections without mass testing and draconian lockdowns.

China reported 26,824 new infections on Sunday -- the highest daily number of new infections since mid-April, and the sixth consecutive day with over 20,000 new cases.

There are early indications of a relapse into the strict zero-COVID policies, particularly in hard-hit areas of the country. In the southern metropolis of Guangzhou, authorities on Monday imposed a five-day lockdown on Baiyun, the city's most populous district with 3.7 million residents, and home to one of the country's busiest international airports.

Earlier this month, Chinese government announced limited easing of its zero-COVID policy, discouraging unnecessary mass testing and overly zealous classification of restricted "high risk" areas. It also scrapped quarantine requirements for close contacts of infected and reduced the time close contacts and international arrivals must spend in quarantine.

Last week, unconfirmed reports emerged suggesting that Chinese refiners asked Saudi Aramco to hold off on delivering some of their December crude purchases, heightening concerns over deeper demand destruction in the world's largest oil importer.

Global oil demand could contract by 240,000 barrels per day (bpd) in the fourth quarter compared to a year ago, according to an International Energy Agency forecast released last week, with the agency eyeing a downshift in annual demand growth in 2023 to 1.6 million bpd from 2.1 million bpd expected for this year.

Demand growth in refined products in particular is seen easing from 1.5 million bpd in 2021 to just 400,000 bpd in 2022 before posting a small decline in 2023.

"China's persistently weak economy, Europe's energy crisis, burgeoning product cracks and the strong US dollar are all weighing heavily on consumption," said IEA.

Further pressuring the oil complex, the U.S. dollar strengthened against a basket of foreign currencies to trade near 107.710 after St. Louis Federal Reserve President James Bullard last week suggested the federal funds rate might go as high as 7% to tame inflation. The Federal Reserve is currently targeting the key overnight borrowing rate between 3.75% and 4%.

"Monetary tightening so far has had a limited effect on prices. Based on this analysis, rates must stand at the minimum of 5% and 5.25%. That would at least get us in the (restrictive) zone," said Bullard.

In September, central bank officials projected the federal funds rate rising to around 4.6% in 2023, with the projection almost certainly to be updated at the next Federal Open Market Committee meeting on Dec. 13-14. Current market consensus sees a 0.5% rate hike in December, but a higher terminal rate at some point next year that poses a greater risk to the economic outlook.

West Texas Intermediate futures for December delivery eased $0.22 to trade near $79.86 barrel (bbl) ahead of expiration this afternoon, with the next-month January futures trading at a nearly $0.20 bbl premium. January Brent futures on ICE declined more than $0.50 to $87.02 bbl. December RBOB futures on NYMEX fell $0.0153 to $2.4055 gallon, with December ULSD futures edging down $0.0072 to $3.5109 gallon.

Liubov Georges can be reached at liubov.georges@dtn.com