DTN Oil

WASHINGTON (DTN) -- West Texas Intermediate futures nearest delivery on the New York Mercantile and Brent crude traded on the Intercontinental Exchange settled Friday's session with losses between 1.5% and 2%. Losses were triggered by a deepening COVID-19 crisis in China, the world's largest oil importer, where government-mandated lockdowns have led to the largest demand shock since the early days of the pandemic, while a strengthening U.S. dollar index in the aftermath of comments from Federal Reserve officials indicating an aggressive pivot towards interest rate hikes further pressured U.S. crude benchmark.

China's fuel demand has fallen by more than 20% in March and April, according to private data analyzed by Bloomberg, hit by the COVID-19 shutdowns in major metropolitan areas of Shanghai and Shenzhen. That is equivalent to a drop in oil consumption of 1.2 million barrels per day (bpd) and marks the largest hit to demand since the lockdown of Wuhan more than two years ago. The decline is estimated to be in the ballpark of 9% of China's daily oil consumption when compared with the 2021 average.

Gasoline demand registered the biggest drop, while jet fuel demand is coming off an already low base amid heavy restrictions on outbound flights from China. Demand for diesel from the trucking industry has also plunged.

China has struggled to contain its latest COVID-19 outbreak that has led to a series of lockdowns across the country, most notably in the financial hub of Shanghai. The government's pursuit of a COVID-zero strategy has resulted in a web of quarantine rules that has crimped mobility and industrial output, snarling supply chains that has undercut fuel consumption.

China's COVID-19 crisis has spread far beyond its borders, with European manufacturers feeling the squeeze from disruptions in Shenzhen factories and Shanghai ports. Overnight data from Eurozone showed business activity in manufacturing stalled near a two-year low in April amid soaring fuel prices and rattled supply chains. Offsetting the decline in manufacturing, Eurozone's growth in the service sector accelerated to a 57.7 eight-month high in April, helped by a loosening of COVID-19 restrictions and still strong demand for services. Hiring also picked up and business expectations for the year ahead improved from March's 17-month low, albeit with confidence remaining subdued by recent standards as concerns over the Ukraine war, rising prices and the lingering effects of the pandemic continued to dampen optimism, especially in manufacturing.

"April saw a two-speed eurozone economy. Manufacturing came close to stalling due to ongoing supply constraints, rising prices and signs of spending being hit by risk aversion due to the war. However, April also saw manufacturers suffer due to a shift in demand from goods to services amid looser pandemic restrictions, most notably via a record surge in spending on activities such as travel and recreation," said Chris Williamson, chief business economist at S&P Global Platts, in comments on the data.

In financial markets, U.S. dollar index regained upward momentum to finish the week at 101.213, gaining 0.6% against a basket of foreign currencies, while further pressuring front-month WTI futures. Greenback's strength follows comments from Federal Reserve Chairman Jerome Powell who said on Thursday that a 50-basis point hike is "on the table" at the Federal Open Market Committee's next meeting on May 3-4. If realized, that would be the first half-point increase since 2000, adding to investor concerns that economic growth, and with it, demand for oil could slow. Minutes released from FOMC's last meeting in March revealed policymakers considered a 50-basis point increase but instead opted for a 25-basis rate hike due to uncertainties triggered by the war in Ukraine. According to CME's FedWatch Tool, investors today assign a 99.8% probability for a 50-basis point hike at Fed's May meeting.

On the session, WTI futures for June delivery fell $1.72 to $102.07 per barrel (bbl), and June Brent dropped $1.68 to $106.65 per bbl. NYMEX RBOB May futures declined 3.36 cents to $3.3050 gallon, and the front-month ULSD contact settled 3.78 cents higher at $3.9386 per gallon.

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

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