Oil Futures Sink as China Lockdowns Threaten Global Demand

Brian L Milne
By  Brian L. Milne , DTN Refined Fuels Editor

CRANBURY, N.J. (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange fell sharply during the first trade session of August, under pressure from concerns over global oil demand after a surge in COVID-19 infections via the Delta variant triggered lockdowns in China, with the draconian measure expected to be further deployed as Beijing looks to contain the spread of the virus.

Agence France-Presse reported Monday an outbreak of Delta coronavirus cases has reached more than 20 cities and a dozen provinces in China, with rising cases moving from the southern coast inland. In the Hunan province, 1.2 million residents in the city of Zhuzhou were ordered to stay in their homes for the next three days, which follows a cluster of cases in Nanjing. Near Zhuzhou in Zhangjiajie, the tourist city of 1.5 million were ordered locked down on Friday (7/30).

Most of China's confirmed cases were found in the Jiangsu province according to Reuters, where economic output was second largest in China behind Guangdong, while rising cases in the industrial city of Yangzhou where five million reside, factories and logistics firms have been shut.

A wave of infections has hit Southeast Asia especially hard over the past few weeks, where vaccinations are low, while Chinese vaccines have proven less robust in shielding those inoculated from getting the virus. China's expected to continue to respond to outbreaks with strict lockdowns, which could inhibit economic growth and potentially further unsettle worldwide supply chain disruptions.

At the Port of Yantian, China's largest container port, operations were reduced to about 30% capacity from late May to late June because of a jump in COVID cases. The port resumed full operations in late June, and reportedly has cleared a backlog of vessels. That backlog has now hit the U.S. West Coast, with American Shipper on Friday reporting 27 vessels at anchor off the ports of Los Angeles and Long Beach in San Pedro Bay, up from nine on June 18. The record was set on Feb. 1 when 40 vessels waited at berth to be offloaded. Across U.S. ports, roughly 80 ships are at anchor waiting to be offloaded, with the peak season for port activity beginning in August.

The latest headwinds for the supply chain accentuate the drag on U.S. economic growth, especially for manufacturers, where lead times in securing necessary raw materials and parts continue to grow. Earlier Monday, the Institute of Supply Management's Purchasing Manager's Index for manufacturing contrasted with market expectations for a modest increase in July from June by sliding 1.1% to 59.5%.

"As we enter the third quarter, all segments of the manufacturing economy are impacted by near record-long raw-material lead times, continued shortages of critical basic materials, rising commodities prices and difficulties in transporting products," said Timothy R. Fiore, CPSM, C.P.M., Chair of the Institute for Supply Management Manufacturing Business Survey Committee.

While businesses remain optimistic and manufacturing is still expanding, albeit more slowly, the inability to meet demand has dampened economic growth domestically. That reality was on display late last week when the Bureau of Economic Analysis reported a 6.5% growth rate by the U.S. economy for the second quarter that, while vibrant, was well below an expected 8.5% annualized expansion rate.

"Worker absenteeism, short-term shutdowns due to parts shortages and difficulties in filling open positions continue to be issues limiting manufacturing-growth potential," said Fiore.

NYMEX September West Texas Intermediate fell to a 1 1/2-week spot low at $70.55, cutting the session loss to $2.69 or 3.6% with a $71.26 barrel (bbl) settlement. October Brent futures settled down $2.52 or 3.3% at $72.89 bbl. NYMEX September RBOB futures erased 6 cents or 2.6% in value with a $2.2747 gallon settlement, and the September ULSD contract ended 5.98 cents or 2.7% lower at $2.1358 gallon.

Brian L. Milne can be reached at brian.milne@dtn.com

Brian Milne