DTN Oil

CRANBURY, N.J. (DTN) -- New York Mercantile Exchange oil futures nearest delivery and the front-month Brent crude contract on the Intercontinental Exchange settled mixed Monday as worry over lost demand amid another lockdown in China as it battles an outbreak of COVID countered global supply tightness, including an energy crisis in Europe.

Mass testing for COVID in China's financial capital of Shanghai as new cases emerge at the fastest pace since May heightened fear of a second lockdown of the city of 26 million, which would limit mobility and dramatically cut demand for transportation fuels as well as slow economic growth. Beijing steadfastly maintained its zero-COVID policy into early June and is not seen wavering should positive cases mount in the latest outbreak in the country of 1.5 billion.

Compounding fears over more lockdowns, bank runs are being reported across China that are further fueling anxiety over the world's second largest economy, with protests emerging in the communist country after depositors were unable to withdraw their funds. Video on twitter shows a throng of men in white and black violently storming a large gathering of protestors seeking the return of their deposits.

ULSD futures found buying support as the Nord Stream 1 pipeline, the single largest pipeline carrying natural gas from Russia to Germany, shut Monday for annual maintenance, with gas flow expected to be stopped for 10 days. There is concern, however, gas flow on the 55 million cubic meter pipeline won't return when maintenance is completed should Russian President Vladimir Putin decide to retaliate against European nations for sanctions against Russian energy imposed to financially hurt Moscow for its invasion of Ukraine.

Those concerns were highlighted after Canada said it would hand over a turbine sent to Siemens Energy in the country for repairs, and Germany agreeing to give the turbine to the pipeline operator as the two countries waive sanctions amid concern over gas supplies. Reuters notes Russia cut gas flows on the pipeline by 40% in June citing the delayed return of the turbine.

Concern Putin would use the pipeline outage as an act of economic warfare was another blow for Europeans, with inflation at an all-time high for the European Union amid Russia's invasion of Ukraine and energy crisis. Those concerns weighed heavily on the euro, which neared parity with the U.S. dollar in index trading for the first time since 2002. The U.S. Dollar Index settled 0.9% higher at 107.829 Monday, and the euro ended down 1.1% at 1.00665.

The U.S. Dollar Index rallied to its highest value since October 2002 on European woes and the flight to safety amid slowing economic growth globally, while the Federal Reserve is on a path to aggressively lift interest rates. The Federal Open Market Committee is widely expected to again lift the federal funds rate 75 basis points when it meets July 26-27 following the mid-June 75 point rate hike, which was the largest single meeting rate increase since 1994, as the central bank fights broadening inflation now at a 40-year high.

On Wednesday, the U.S. Bureau of Labor Statistics will release the consumer price index, with the inflation indicator expected to have increased 1.1% in June from May while year-on-year is seen climbing to 8.8% from 8.6% in May. Joined by Friday's (7/8) jobs report, with BLS reporting job growth of 372,000 in June -- nearly 100,000 more than expected, would show inflation is broadening despite modest respite in retail gasoline and diesel prices in July, which have dropped back from record highs reached last month.

This trajectory for inflation will force the Fed to remain aggressive in lifting the federal funds rate, now in a 1.5% to 1.75% target range, to avoid the potential that it becomes entrenched in consumer's psychology. In June, U.S. consumer sentiment fell to a record low, according to the University of Michigan, with market consensus seeing no improvement for the sentiment indicator so far in July. University of Michigan will release the twice a month survey on Friday (7/15).

At settlement, NYMEX August West Texas Intermediate futures were down $0.70 at $104.09 barrel (bbl), and ICE August Brent futures ended the session little changed at $107.10 bbl after erasing early losses. NYMEX August RBOB futures gained 1.51 cents to a $3.4622 gallon settlement, while August ULSD futures rallied 9.52 cents on the session to $3.7681 gallon.

Brian L. Milne can be reached at brian.milne@dtn.com