DTN Oil

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange extended losses into the first trading session of September after China announced a COVID lockdown for a megacity of 21 million people in Sichuan province, a key manufacturing hub for Western technology and automaker brands, in a move that weakens oil demand and further disrupts global supply chains.

All of China's 31 provinces have reported COVID-19 infections in the past ten days, according to Chinese health authorities, a troubling sign for the world's second largest economy as it battles yet another resurgence of the Omicron variant. Chinese metropolis of Chengdu with a population larger than some European countries will go into full lockdown Thursday after the discovery of a cluster of COVID-19 cases that triggered Beijing's "zero-COVID" policy of mass-testing and limited personal movement. The city accounts for about 1.7% of China's gross domestic product and is home to major technology and automakers companies, including Toyota Motor Corp. and Foxconn Technology Group, the world's largest assembler of Apple Inc.'s iPhones, and Intel Corp. among others.

Compounding the pain for global supply chains, authorities in the southern technology hub of Shenzhen this week tightened restrictions on movement and deployed mass-testing after a sudden outbreak at a factory. In total, 41 cities that are responsible for 32% of China's GDP are currently in the midst of a COVID outbreak, according to Capital Economics.

The China lockdowns are troubling news for a global oil market plagued by growing signs of demand destruction in the United States and the European Union. U.S. gasoline consumption fell to 8.9 million barrels per day (bpd) in the four weeks of August -- well below the 2021 consumption rate and on par with 2020 when travel restrictions due to the COVID-19 pandemic were still in place limiting personal movement.

Nationally, prices at the gas pump fell every day in August but did little to lure Americans back to the roads. Clues as to why lower pump prices failed to incentivize more driving can be found in a recent survey by the American Automatic Association that showed two-thirds of American adults have already changed their driving habits or lifestyle since March. Drivers' top two changes to offset high gas prices, which reached a record high of more than $5 gallon in June, are driving less and combining errands. With summer driving season officially ending with the Labor Day holiday (9/5), there is little hope that gasoline demand would improve above its historic norms heading into the colder months.

Prospects for distillate demand don't look much brighter. EIA data show distillate consumption in the United States eroded for the third consecutive week through Aug. 26 to 3.566 million bpd -- the lowest level since the week leading up to July 4th holiday. Against last year's level, distillate fuel supplied to the U.S. market fell 824,000 bpd or over 18%. Demand for middle distillate fuel typically correlates closely with economic activity that is expected to weaken further as the Federal Reserve moves to fight historically high inflation.

On Aug. 26, Fed Chairman Jerome Powell said the central bank is nowhere near the end of its battle against inflation and will remain resolute even if the U.S. economy tips into recession.

Near 7:30 a.m. EDT, NYMEX October West Texas Intermediate futures fell $1.79 to $87.77 barrel (bbl), while international crude benchmark Brent for November delivery traded at $93.67 bbl, down $1.97. NYMEX October RBOB futures fell nearly 6 cents to trade at $2.3718 gallon, with NYMEX October ULSD futures retreated 18.76 cents to $3.4798 gallon.

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