DTN Oil

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange settled Monday's session mixed and Brent crude on the Intercontinental Exchange fell to its lowest point since early January after widespread protests in some of China's largest cities against Beijing's zero-COVID policies led to fear of a potential government crackdown and deeper social unrest in Asia's largest economy.

The rare act of defiance against COVID policies in China have become increasingly political in their nature as thousands of demonstrators shouted for Xi Jinping to resign for the failure to contain the virus after three years of rolling lockdowns. China's economy is already on shaky grounds, and the protests have raised concerns about what direction it takes from here.

Investors are now reassessing the risk that the protests could result in stronger lockdowns and a harsher government response, potentially harming the economy even further. For context, retail and home sales in China fell sharply this year as consumers cut spending amid COVID uncertainty and lackluster government stimulus. Global demand for Chinese exports also declined compared to previous years as Europe is expected to enter into recession at some point next year and the U.S. economy is slowing under pressure from rising interest rates.

Goldman Sachs analysts believe that even before the protests China's potential growth "will be meaningfully lower than previously thought," adding that demonstrations now raise the risk of a "messy exit from zero-COVID policies with rising infections and social unrest."

Oil traders pay close attention to these developments because China is the world's leading oil importer, consuming an average 15 million barrels per day (bpd), according to the International Energy Agency.

There have been reports suggesting Chinese refiners are holding back on new oil purchases as fuel demand falls domestically, waiting to see how the effect of new COVID policies and now protests will play out in the market. Traders said more than 10 cargos of Russia's ESPO crude due to load in December and bound to Asian customers are left unsold. Around 35 cargos of oil from fields in eastern Siberia normally sail from Russia's far-east Kozmino port to buyers in Asia each month. Analysts estimate at least 1 million bpd in oil demand from China has been lost due to COVID restrictions.

Also this week, oil traders are monitoring negotiations among members of the European Union aimed at capping the price of Russian oil exports after talks broke down on Friday amid stern objections from Poland and Baltic states. No announcement has yet been made but the considered price cap is reportedly within a range between $65 and $75 per barrel (bbl) -- a level well above Russia's cost of production and current market price for its key crude benchmark Urals. Poland and Baltic states reportedly demand the price cap to be within $20-$30 range, which is a nonstarter for shipping nations including Greece, Italy, and Malta. For context, Urals is currently sold at a $25 discount to Brent crude, meaning Russian oil is offered below $60 bbl on the global market. Russians were forced to offer steep discounts against Brent crude to sell oil even to their loyal customers in Asia amid a backlash for dealing with Vladimir Putin's regime.

The purpose of the price cap was to take advantage of G7's control of the world's maritime insurance, financing, and shipping services to starve Putin's regime of revenues to conduct the war in Ukraine. It's unclear how a price cap that exceeds the current market price could achieve this goal.

At settlement, West Texas Intermediate futures for January delivery advanced $0.96 to $77.24 bbl, with January Brent futures on ICE falling $0.44 to $83.19 bbl. Next-month delivery February Brent contract expanded its premium against the expiring contract to a $0.70 contango. December RBOB futures on NYMEX edged higher to $2.3306 gallon, with the January contract settling the session at a $0.0583 discount at $2.2723 gallon. December ULSD futures fell $0.0237 to $3.2154 gallon and the next month contract slid to $3.1514, down $0.0169 in afternoon trading.

The January Brent, December RBOB and ULSD futures contracts expire Wednesday afternoon.

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