Oil Futures Slump on Fear of China Lockdown, EU Recession

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON, D.C.(DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and the front month Brent crude contract on the Intercontinental Exchange fell sharply on Tuesday amid a one-two punch of a fresh COVID-19 resurgence in China, unnerving investors over another demand-sapping lockdown in the world's second-largest economy, and considerable deterioration in the economic outlook for the Eurozone after the start of annual maintenance on Nord Stream 1 -- the single largest pipeline carrying Russian gas into continental Europe exacerbated concerns over an energy crisis, further weakening the euro against U.S. dollar.

An economic survey out of Germany, the Eurozone's largest economy, showed a remarkable deterioration in business activity across energy-intensive and export-oriented industries in July. Index of expectations for the next six months has fallen to -53.8 from -28 in the previous month, with experts citing inadequate energy supplies behind the sudden drop in economic activity. Germany reported its first monthly trade deficit since 1991 at the end of the second quarter as manufacturers struggled to absorb surging costs for imports and softer demand for their products in Asia.

This comes as Nord Stream 1 pipeline, with a capacity of 55 million cubic meters per year, was shut down Monday for annual maintenance, with gas flow expected to be stopped for 10 days. There is concern, however, gas flow won't return when maintenance is completed should Russian President Vladimir Putin decide to retaliate against European nations for sanctioning Russia. Germany has greenlighted the restart of 10 coal-fired power plants this month because of concerns over Russia's intentions, particularly after Moscow reduced gas flows through Nord Stream 1 by 60% since the beginning of the invasion.

Economists polled by Bloomberg estimate the probability of Eurozone recession has increased to 45% from 35% in the previous month and 20% before Russia invaded Ukraine. Germany, one of the most vulnerable members of the currency bloc to cutbacks in Russian energy flows, is more likely than not to see economic output shrink.

Recession concerns are weighing 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 traded 0.41% higher at 108.270 in early index trade Tuesday, with the euro eroding further to 1.00625.

With uncertainly skewed to the downside, Organization of the Petroleum Exporting Countries in its Monthly Oil Market Report released this morning downgraded its second quarter demand projections to 98.33 million bpd from 99.33 million bpd seen in the first quarter. For the year, however, global oil demand growth is projected to remain unchanged from the previous month's assessment at 3.4 million bpd. Oil demand in the developed and industrialized countries is estimated to increase by 1.8 million bpd, while developing countries are seen growing by 1.6 million bpd. Total oil demand is projected to average 100.3 million bpd.

Demand for OPEC crude in 2022 remains unchanged from the previous month's assessment to stand at 29.2 million bpd, which is around 1.1 million bpd higher than in 2021. Based on forecasts for world oil demand and non-OPEC supply in 2023, demand for OPEC crude is expected to reach 30.1 million bpd, 900,000 bpd higher than the 2022 level.

Further weighing on the complex, outbreak of Omicron subvariant BA.5 in China raised the threat of another government clampdown on economic activity in Asia's largest economy. More than 2,300 locally transmitted cases have been reported nationwide in the past seven days, with infections again on the rise in the commercial and manufacturing powerhouse of Shanghai, a city of 26 million. 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.

Near 7:30 AM ET, NYMEX August West Texas Intermediate futures fell below $100 bbl, down $4.76, and ICE August Brent futures started the session more than $4 bbl lower at $102.65 bbl. NYMEX August RBOB futures plummeted 15.86 cents to $3.3034 gallon, while August ULSD futures declined 9.89 cents to $3.6692 gallon.

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

Liubov Georges