WTI, Brent Drop 4% on China's Slowdown, Global Inflation

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 settled Monday's session with sharp losses spearheaded by tightening lockdowns of China's largest cities and flagging fuel demand on the back of the largest COVID-19 outbreak since beginning of the pandemic, as well as announced reserve releases from the International Energy Agency and the United States that eased concerns over near-term supply shortages on the global market.

China's producer price index, which measures factory inflation, increased 8.3% on annual basis, according to the government data released Monday, threatening to exacerbate rising prices for manufactured goods worldwide. China's consumer price index, which tracks the cost of everyday goods and services, also rose above expectations, albeit by a modest 1.5%, year-on-year, compared with 0.9% in February. Rising prices for everyday goods and services highlight rising challenges for the world's second largest economy that is struggling to control the latest COVID-19 outbreak.

China's Premier Li Keqiang warned Monday that China will have to step up imports of food to replenish its stockpiles in the coming months, which is going to put additional pressure on global inflation. "Economic pressures are increasing. Because of lockdowns, food prices are going to rise further," he added.

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 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.

On Tuesday, investors will turn their focus to inflation data in the U.S. where the Bureau of Labor Statistics scheduled to release the CPI for March. Markets expect consumer prices to jump 1.2% in March, bringing year-on-year inflation to 8.5% from 7.9% in February. That would be the fastest rate of price appreciation since 8.3% in January 1982. A higher-than-expected inflation reading is set to give Federal Reserve policy a ringing endorsement, with a growing number of central bank officials indicating they are ready to raise interest rates by 50 basis points at the next FOMC meeting.

Underlining recent gains for the oil complex, Russia's crude production is expected to suffer a heavy blow from the Western sanctions that have already shaved off between 4% and 5% from Russian oil production, according to Russia's Deputy Prime Minister Alexander Novak. 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 that he does not expect the reductions to affect domestic supplies, and that exports would continue.

Due to those challenges, crude oil production from OPEC+ allies fell in March for the first time in over a year, according to S&P Platts survey. The data show OPEC raised output by 60,000 bpd to 28.73 million bpd, but that was more than offset by a 160,000-bpd decline by the block's allies, that pumped 13.91 million bpd.

On the session, NYMEX May West Texas Intermediate futures fell below $95 barrel (bbl), down $3.97 from Friday's settlement to $94.259 bbl, and the ICE June Brent contract declined $4.30 to $98.48 bbl. NYMEX May RBOB futures fell 12.85 cents to $3.0031 gallon and NYMEX front-month ULSD dropped 4.99 cents to $3.2677 gallon.

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

Liubov Georges