Crudes Gain Even as China Lockdowns Erode Demand Outlook

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- Even with the U.S. dollar trading at its highest level since March 2020, oil futures nearest delivery on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange moved higher early Tuesday following Monday's losses sparked as investors priced in a larger-than-expected economic slowdown in China due to prolonged and more widespread COVID lockdowns which are causing a deeper slump in personal consumption and investments that are leading to heightened stagflationary risks for the Asian region.

The International Monetary Fund cut its Asian growth outlook to 4.4% this month, down 0.5% from its previous projections made in January, with most of the decline attributed to China's COVID shutdowns and deepening supply shock in the region.

"Therefore, the region faces a stagflationary outlook, with growth being lower than previously expected, and inflation being higher," said Anne-Marie Gulde-Wolf, acting director of the IMF's Asia and Pacific Department.

China is now facing a deeper economic contraction then was forecasted just a month ago, with Shanghai -- the nation's financial hub -- remaining in lockdown mode for over four weeks while Beijing's 21 million residents are now being mass-tested after a cluster of cases were discovered in the city's most populous district which is home to embassies and many foreign multinationals.

"The virus had been spreading undetected among different communities for a week," said Beijing health authorities.

Beijing contributes nearly 5% to the country's gross domestic product and is the second most populous city in the nation. For comparison, Shanghai is China's most populous city and contributes 3.8% to the national GDP, according to the latest available figures from the National Bureau of Statistics.

Amid COVID headwinds, Chinese stocks fell the most in more than two years Monday. The Shanghai Composite and CSI 300 indexes closed down 5.1% and 4.9%, respectively, as investors worried that strict policies to combat the outbreaks would hit China's economic growth and corporate profits.

For oil markets, China's fuel demand looks more uncertain today than at any point since the beginning of the pandemic when the Wuhan outbreak brought to a standstill the world's second largest economy. According to various estimates, China's daily oil consumption may have fallen by as much as 1.4 million barrels per day (bpd) or 20% over the March-April period. It's fair to assume 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 mass testing ordered by health authorities has led to the closure of businesses in parts of the city.

Investors anticipate deeper disruptions to China's manufacturing and movement of goods, likely contributing to more inflation in the European Union and the United States. European Central Bank President Christine Lagarde, however, said tighter monetary policy from central banks won't necessarily result in lower inflation, adding that EU and the United States are "facing a different beast" when it comes to higher consumer prices.

Lagarde, appearing on CBS's "Face the Nation" on Sunday, said 50% of Europe's current record inflation stems from surging energy costs.

"If I raise interest rates today, it is not going to bring the price of energy down," Lagarde said.

The German government Monday raised its 2022 inflation forecast to 6.1%, up from 3.3% expected just three months earlier. Germany's producer price index, a measure of inflation on the 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.

In the U.S., where the Federal Reserve has already raised rates once and is poised to do so again next month, inflationary pressure has been made more acute by a "tense" labor market, Lagarde added.

In early trade, NYMEX West Texas Intermediate futures for June delivery advanced $1.50 to near $100 barrel (bbl), and June Brent rallied $1.60 to near $103.85 bbl. NYMEX RBOB May futures gained 3.5 cents to near $3.2750 gallon, while the front-month ULSD contact rallied 11.86 cents to $4.2095 gallon.

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

Liubov Georges