DTN Oil

WASHINGTON (DTN) -- Amid an accelerating selloff across U.S. equity markets, oil futures nearest delivery on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange fell sharply at the start of the new trading week amid a one-two punch of a rallying U.S. dollar and signs of demand destruction in Asia and European Union after Saudi Aramco, the world's largest oil producer, slashed its official selling prices for the two regions for next month's crude deliveries.

Aramco's price cut for Asia, Europe and Mediterranean buyers was more aggressive than analysts had anticipated, having reduced Asian differentials between $4.95 per barrel (bbl) and $5.10 bbl from all-time highs set for May deliveries. The decision to cut prices is the clearest sign yet that Asian fuel demand is flagging in the face of harsh lockdown measures slapped on China's largest cities and rattled supply chains elsewhere in the region.

According to various estimates, demand for gasoline, diesel and aviation fuel in China slid 20% last month, accounting for a 1.4 million bbl decline in daily consumption. It marked the largest hit to demand since the lockdown of Wuhan -- the epicenter of COVID-19 pandemic more than two years ago. Looking forward, China's "zero COVID" policy is unlikely to fade into the abyss as new mutations of COVID-19 continue to evolve that are more infectious and spreading at a faster rate than the original strain of SARS-2.

For European-bound cargoes, Aramco lowered its official selling prices by an average of $2.50 to $5.60 bbl premium over ICE Brent crude. European refiners are struggling to find suitable replacement for its Russian crude diet of Urals, which is medium sour compared Aramco's flagship Arab light sweet crude. Additionally, it's not immediately clear whether proposed embargo on Russian oil would in fact become a standing law after several member states voiced their opposition.

Hungarian Prime Minister Viktor Orban issued a statement on Monday saying that his country cannot accept a new round of European Union sanctions on Russia until his country's concerns are addressed. Previously, Orban compared an embargo to an atomic bomb being thrown on the Hungarian economy.

According to wire services, Hungary now wants a total opt-out from the ban despite an offer of an extended transitional period, while two other member states in Central and Eastern Europe -- Czech Republic and Bulgaria, have also requested more time to transition away from Russian oil.

Under legislation proposed last week, European Commission was prepared to give only two EU members, Hungary and Slovakia, until December 2023 to end purchases of Russian oil, while the other 25 members would phase-out all imports by October.

The ongoing challenges in reaching a viable agreement on Russian embargo reflects the fact that the measures being proposed would be deeply painful for some countries to absorb. In 2021, almost two-thirds of the bloc's crude oil imports came from Russia, with Russian oil satisfying more than 60% of Slovakia and Hungary's fuel demand, with similar dependencies in neighboring Czech Republic and Bulgaria.

In financial markets, U.S. dollar index climbed to 104.21 midmorning Monday -- the highest trade since December 2002, before retreating to end slightly lower at 103.689, while equity markets saw another session of bloodletting. Dow Jones Industrials plunged more than 650 points to 32,245 and S&P 500 declined 132 points or 3.2%.

The volatile session followed comments from Atlanta Federal Reserve Chairman Rafael Bostic suggesting two or three more 50-basis point increases in federal funds rate are needed this year, while underplaying the likelihood for a 75-basis point hike.

Last week, U.S. Federal Reserve raised interest rates by 50-basis points in addressing the worst inflation seen in the United States in 40 years. It was the first time in 22 years the central bank hiked rates at a single meeting by this much. The decision was unanimous among all 12 members of the policy-setting Federal Open Market Committee.

On the session, NYMEX June West Texas Intermediate dropped $6.68 to settle at $103.09 bbl and Brent crude fell below $106 bbl, down $6.45. NYMEX June RBOB futures retreated from an all-time high settlement $3.7590 gallon reached on Friday, down nearly 12 cents to $3.6419 gallon, and the front-month ULSD contract declined 11.94 cents to $3.8349 gallon.

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