WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange continued lower in early trade Tuesday, with both the U.S. and international crude benchmarks sliding below $100 per barrel (bbl) after China confirmed a sharp rise in Omicron infections across several provinces, triggering concerns over a return to draconian lockdowns to slow the COVID-19 spread, while talks between Russian and Ukrainian delegations extended into a second day on Tuesday raising hope both parties would soon come to a ceasefire agreement.
Oleksiy Arestovych, an advisor to Ukraine's President Volodymyr Zelensky, revealed on Monday that a peace agreement with Russia could be established within one or two weeks at the earliest and by May the latest.
"There is certain progress regarding the talks between the two countries, and if President Zelensky says it is an option, it would probably happen. If the Russians would not agree to this, it wouldn't be considered as a possibility in the first place," Arestovych added.
Despite heavy shelling of heavily populated Ukrainian cities, the Russian army was unbale to make real progress on the frontlines amid logistical issues, low morale, and lack of basic items like food and fuel. There are unconfirmed reports of widespread hunger among the Russian troops.
Zelensky said a fourth round of talks that started on Monday was extended into Tuesday, signaling that the two parties have made progress in negotiations. Should conflict end in coming days, this would provide much needed relief for the global commodity markets under siege from tightening sanctions that threaten to further disrupt global supply chains that have spiked commodity prices.
Also weighing on the oil complex, China is now battling its worse COVID-19 outbreak since the beginning of the pandemic in early 2020 after health authorities reported 5,280 new COVID-19 cases on Tuesday versus 1,437 just two days prior. Lockdowns were imposed in some key industrial cities, including the entire Jilin province and tech hub Shenzhen.
Concerns over potential disruption to global supply chains are growing. Jilin and Shenzhen have populations of 24 million and 17 million, respectively. The acceleration in COVID cases and severe response from China's health authorities will surely follow.
Beijing maintains a "zero COVID policy" that will weigh on China's economy and reverberate through the global economy through supply chain disruptions. For the oil markets, new restrictions on economic activity in China will lead to a reduction in fuel demand that will be welcomed by energy importers that have seen prices surge amid a very tight global market.
Some relief also came on the back of reports indicating that China and India are working on mechanisms that would allow them to purchase cheaper oil from Russia using Rupee and Yuan settlements, according to sources familiar with negotiations. Last year, Russia's oil shipments to India averaged 43,400 barrels per day (bpd), a marginal amount when compared to the 4.8 million bpd in India's total oil demand. That might soon change. Bloomberg reported that the country's top refiner, IOC, bought 3 million bbl of Russian Urals crude via tender for May delivery -- its first purchase of the grade since Russia invaded Ukraine on Feb. 24. In comparison, China imports roughly 15% of its crude oil imports from Russia, behind only Saudi Arabia. It must be noted that prior to the invasion of Ukraine, Beijing signed a 10-year extension to an existing deal with Russia for 200,000 bpd of oil supply.
In outside markets, the Federal Open Market Committee begins a two-day policy meeting today that comes against a backdrop of 40-year high inflation and concern that Russia's invasion of Ukraine could hurt global economic growth. While the Fed is expected to stick to its plans to raise interest rates by 25 basis points, investors are looking for clarity on how the war in Ukraine might affect the pace of future tightening. CME Fed's Watch tool shows investors assign a 98.3% likelihood that the central bank will raise intertest rate by 25-basis points on Wednesday.
Near 7:45 A.M. ET, NYMEX April West Texas Intermediate fell $8.43 to $94.59 bbl, and ICE Brent May contract plunged $8.36 to $98.47 bbl. NYMEX April RBOB futures plummeted 22.25 cents or 7% to $2.9469 gallon, and April ULSD futures slumped to $2.9977 gallon.
Liubov Georges can be reached at firstname.lastname@example.org