Oil Futures Fall on Shanghai Lockdown, Kazakhstan Exports

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 fell sharply in early trade Monday, with U.S. and international crude benchmarks trading 5% lower after China announced new quarantine restrictions in Shanghai, the country's financial and business hub, as health authorities there struggle to contain a resurgence of the COVID-19 virus, underscoring ongoing risks for demand growth in a country that is the world's largest importer of crude oil.

Near 7:30 a.m. EST, NYMEX May West Texas Intermediate futures plunged below $108 barrel (bbl), trading $5.61 bbl lower, and ICE May Brent futures retreated $5.32 to $114.23 bbl. NYMEX April RBOB futures plummeted 15.5 cents or 5% to $3.3150 gallon, and April ULSD futures dropped back 21.47 cents to $3.8999 gallon.

Half of Shanghai, a city of 25 million people, will be locked down between today (3/28) and Friday (4/1), and the other half between April 1st and 5th, with the Huangpu River, which passes through the city, serving as the dividing line as authorities attempt to test the entire megapolis for COVID-19.

The city has seen a sharp increase in daily COVID-19 infections over the past two weeks, pressuring mobility and business activity. Peak road congestion in Shanghai was down 36% on Sunday from a year earlier, according to private data, 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 as it battles the fast-spreading strain of omicron. There are also restrictions on movement in the manufacturing center of Shenzhen in the Jilin province situated in the northeast and Langfang City near Beijing.

China's COVID-19 struggles may give some relief to the oil market that has been hammered by sanctions levied against Russian energy trade and laggard production growth in OPEC+ countries. United Arab Emirates Oil Minister Suhail al Mazrouei reiterated on Monday that no one can replace Russian oil exports at the moment, adding that 10 million bbl in daily oil production from Russia makes the country a critical member of OPEC+ alliance.

Despite the chatter over new sanctions, the European Union did not announce a ban on the purchase of Russian oil during talks with world powers in Europe last week. Countries that are less dependent on Russian oil, such as Sweden, Ireland, and the Czech Republic, view an oil ban as an option while some of the bloc's largest importers, like Germany and Netherlands, remain opposed to the idea.

Further pressuring the complex, the operator of Caspian Pipeline Consortium on Friday (3/25) partially restarted flows after Russia throttled capacity on a major pipeline carrying oil from Kazakhstan oilfields to the export ports on the Black Sea. It remains unclear how much crude is currently being offloaded at the port of Novorossiysk.

The CPC pipeline has a 1.4 million barrels per day (bpd) throughput capacity and carries crude oil from oilfields in central Asia to export terminals on the Black Sea. A prolonged disruption of the CPC pipeline could have forced Kazakhstan to shutter producing wells because of limited storage capacity that could have inflicted long-lasting damage to the country's production capacity. Kazakhstan Energy Minister Bulat Aqchulaqov indicated on Friday that one of the three moorings at the site sustained little damage from an alleged storm and partially restarted operations. Last week, Russian officials argued it could take up to six weeks to fix damaged infrastructure at the port that processes up to 90% of Kazakhstan oil exports.

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

Liubov Georges