Crudes Sink 7% on China Demand Fear, Slowing Global Growth

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange accelerated losses in afternoon trade Monday amid a one-two punch of flaring COVID-19 infections in China that triggered quarantine restrictions in the country's manufacturing and business hubs, undermining mobility and economic activity in the world's second largest economy, and signs of slowing global growth under pressure from surging inflation and rattled supply chains.

On the session, NYMEX May West Texas Intermediate futures plunged $7.94 or more than 7% to settle a tad below $106 bbl, with losses accelerating post-settlement, and ICE May Brent futures retreated to $112.48 bbl, down $8.17 bbl on the session. NYMEX April RBOB futures plummeted 25.12 cents or 7% to $3.2188 gallon, and April ULSD futures dropped back 33.12 cents to $3.7834 gallon.

At the beginning of the new trading week, investors shifted focus to demand concerns after China announced new lockdown measures for its financial center Shanghai, where COVID-19 infections nearly tripled over the past week. Municipal health officials will now test the city of 25 million people in two separate stages beginning Monday through April 5th. The lockdown follows similar measures introduced in manufacturing center of Shenzhen in the Jilin province and Langfang City near Beijing.

China has struggled to contain a highly infectious Omicron variant, BA.2, that has spread like wildfire in recent days despite Beijing's "zero-tolerance policy" that led to Chinese officials to lockdown entire cities if needed to stop the spread. Private data showed that peak road congestion in Shanghai was down 36% on Sunday from a year earlier, while in Beijing, which is not yet subject to restrictions, traffic levels were 25% lower year-on-year. China has imposed more quarantine measures over the past two weeks than at any other point in the pandemic.

Aside from an immediate demand hit in China, investors are also looking at near-term risks to global economic growth caused by the crisis in Ukraine. International Monetary Fund warned last week that "forecasts due in April will show that the war in Ukraine will slow global economic growth but will not cause a global recession." Rather, the crisis will have an outsized impact on emerging economies that are still struggling with the COVID-19 pandemic and will now face the risk of recession due to shocks from higher food and energy prices, and tighter financial conditions due to interest rate hikes in advanced economies.

IMF identified three channels of crisis. One, higher prices for commodities like food and energy will push up inflation further that, in turn, erodes the value of incomes and weighs on demand. Two, neighboring economies in particular will grapple with disrupted trade, supply chains, and remittances as well as an historic surge in refugee flows. And three, reduced business confidence and higher investor uncertainty will weigh on asset prices, tightening financial conditions and potentially spurring capital outflows from emerging markets.

Both Russia and Ukraine are major commodities producers, and disruptions have caused global prices for oil and natural, metals, and wheat to soar. Food costs have jumped, with wheat prices, for which Ukraine and Russia make up 30% of global exports, reaching a record.

Steeper price increases for food and fuel may spur a greater risk of unrest in some regions, from Sub-Saharan Africa and Latin America to the Caucasus and Central Asia, while food insecurity is likely to further increase in parts of Africa and the Middle East.

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

Liubov Georges