DTN Oil

WASHINGTON (DTN) -- With the exception of the advance in the ULSD contract, oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange settled the Monday session with sharp losses. The drop was triggered by concerns over expanded quarantine restrictions in China after health authorities discovered a new cluster of Omicron cases in Beijing, a city of 21 million people, prompting citywide testing and renewed controls on movement in and out of the affected area.

China's oil demand looks more uncertain today than it did just a week ago when health authorities proposed to loosen up COVID-19 lockdowns in the nation's financial hub -- Shanghai. Since then, the death toll in the city nearly tripled, spooking officials in Beijing and strengthening the case for continued lockdown measures. According to various estimates, China's daily oil consumption may have fallen by as much as 1.4 million barrels per day or 20% over the March to April period. It's fair to assume that gasoline demand in China has been hit particularly hard given the intensity of COVID lockdowns there. Those estimates have yet to include the looming lockdown in China's capital city of Beijing where health authorities just ordered mass testing and the closure of businesses in parts of the city. "The virus had been spreading undetected among different communities for a week," said Beijing health authorities.

Investors are worried that strict policies China put in place to combat the Omicron surge will further disrupt global supply chains. Continued disruptions to manufacturing and the movement of goods since the start of the pandemic have contributed to U.S. inflation reaching a four-decade high. New lockdowns in China and Russia's war in Ukraine are likely to add to price pressures. The German government on Monday raised its 2022 inflation forecast to 6.1%, up from 3.3% expected just three months earlier. German producer price index, a measure of inflation on a wholesale level topped 30% in March, according to the country's Federal Statistics Office, making it the highest level since the agency began collecting data 73 years ago. "Mainly responsible for the rise of energy prices were the strong price increases of natural gas, which were up 144.8% on March 2021," the statistics office said in a statement. Global energy prices were rising before Russian President Vladimir Putin ordered the invasion of Ukraine. As economies began to reopen from their pandemic lockdowns, demand for fuel surged and wholesale prices shot up. Western sanctions on Russia's coal and oil exports -- and efforts by the European Union to slash consumption of its natural gas -- have pushed prices up even further. Due to those factors, Morgan Stanley revised down its 2022 economic growth forecasts for the euro area from 3% to 2.7%, anticipating a meaningful slowdown in economic growth in the second half of this year.

Against these headwinds, the U.S. dollar index climbed on Monday to its highest trade since April 2020 when the global pandemic shuttered a large chunk of the global economy, squeezing investors into the safe-haven currencies like the dollar. The greenback sliced through the basket of foreign currencies at the start of the week to finish at 101.769, while the Chinese yuan eroded further against the dollar.

On a session, NYMEX West Texas Intermediate futures for June delivery fell $3.53 to $98.54 per barrel (bbl), and June Brent dropped $4.33 to $102.32 per bbl. NYMEX RBOB May futures declined 6.52 cents to $3.2398 per gallon, while the front-month ULSD contact rallied 15.23 cents to $4.0909 per gallon.

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

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