WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange fell 3% or more early Monday as investors assessed the supply impact from huge releases from emergency reserves announced by the United States and International Energy Agency, while further lockdowns in major cities in China flagged concerns over demand destruction in the world's second largest economy.
China's largest COVID-19 outbreak since the beginning of the pandemic continues to spread despite extended lockdown of Shanghai's 25 million people, with restrictions weighing on its economy and straining global supply chains. Cases of COVID-19 in Shanghai have surged to 130,000 as of Monday, raising fears that the lockdown of China's largest city would continue.
"The lockdowns that are slowing oil demand in the world's second-largest consumer country threaten to persist for even longer," said Commerzbank in the statement on Monday.
The lockdowns are prompting canceled flights and movement restrictions that could cut 1.2 million to 1.3 million barrels per day (bpd) of oil demand, according to estimates from Commerzbank.
Additionally, China's southern city of Guangzhou, a trading hub, is implementing a series of restrictions after local authorities warned the 20 cases they found last week could be the tip of the iceberg. The growing containment measures across China are an increasing drag on its economy, and have global consequences for growth, supply chains and inflation. The World Bank slashed China's 2022 growth forecast, estimating gross domestic product would grow 5% this year, down sharply from last year's 8.1% expansion rate. That's also lower than China's official target of about 5.5%.
China's ongoing struggles with the virus come on top of the announced massive release of oil reserves by IEA countries to begin in May that have somewhat eased concerns over supply availability after levied sanctions on Russian energy exports. The IEA on Friday (4/8) confirmed a coordinated strategic release of 240 million barrels (bbl) of oil reserves will take place over six months, a rate equivalent to 1.25 million bpd.
Underlining recent gains for oil prices, Russia's oil production will likely suffer a heavy blow from Western sanctions that have already shaved off between 4% and 5% from Russian oil production, according to Russia's Deputy Prime Minister Alexander Novak, meaning the loss of roughly 500,000 to 600,000 bpd of output. The Organization of the Petroleum Exporting Countries in its most recent Monthly Oil Market Report estimated Russian oil production averaged 11.45 million bpd in February, although Moscow itself failed to publish monthly production figures.
"Logistics, as well as financial problems associated with insurance and the use of ships are changing," Novak told reporters, according to the Prime news agency. "Therefore, we will have an adjustment in April. There will also be adjustments to refining, there will also be a decrease in refining volumes," he said, adding he does not expect the reductions to affect domestic supplies, and that exports would continue.
IEA estimates Russian crude and petroleum products exports would plummet between 2.5 million and 3 million bpd this month from 7.8 million bpd in February.
In early trading, NYMEX May West Texas Intermediate futures fell $4.45 to near $93.85 bbl, and the ICE June Brent contract declined to $98.65 bbl, down more than $4. NYMEX RBOB fell 10.7 cents to near $3.0245 gallon, and NYMEX ULSD dropped 6.5 cents to near $3.2525 gallon.
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