Oil Rallies as China Eases COVID Curbs, Lifting Sentiment

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange advanced in early trading Tuesday after Chinese authorities signaled some easing of the harshest lockdown measures across the nation's largest cities, quelling antigovernment protests, while chatter of deeper production cuts from OPEC+ alliance further lifted West Texas Intermediate and Brent crude contracts.

Investors breathed a sigh of relief Tuesday after widespread protests across China's largest cities lost momentum amid a heavy presence of police and armed forces as health authorities condemned "excessive COVID curbs." Local governments in Beijing and Shanghai said they would no longer require steel gates to block people or emergency personnel from entering apartment compounds where infections are found. There have also been reports that some COVID-19 restrictions are being lifted in Urumki, the epicenter of protests where a fire in a high-rise apartment building took the lives of 10 people as rescue teams were unable to reach the scene amid COVID blockades.

The minor concessions are a very small step in a mountain of strict zero-COVID policies that govern every move of each person in a system of rolling lockdowns. Authorities still failed to address public concerns over a lack of vaccine mandates or scrapping of quarantine system.

Personal mobility in China dropped to a seven-month low last week, according to private data, with China's fuel consumption already lagging 1 million barrels per day (bpd) below its pre-COVID levels.

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."

Still, markets found support from these policy adjustments, with Hong Kong's Hang Seng index ended its session 5.24% higher to 18,204.68 with the Shanghai Composite climbing 2.31% to 3,149.75. Futures tied to the S&P 500 ticked up 0.3%, pointing to the broad-market index recouping some losses after closing down 1.5% the day before. Nasdaq-100 futures rose 0.5%. U.S. dollar declined 0.33% against the basket of foreign currencies to trade near 106.320, further supporting the oil complex.

WTI futures for January delivery advanced $1.78 to $79.01 barrel (bbl), with January Brent futures on ICE gaining $2.29 to $85.48 bbl. Next-month delivery February Brent contract expanded its premium against the expiring contract to a $0.57 contango. December RBOB futures on NYMEX edged higher to $2.3719 gallon, with the January contract trading near $2.3719 gallon. December ULSD futures added $0.0446 to $3.2600 gallon and the next month contract gained to $3.2600, up $0.0446 in overnight trading.

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

Further lifting the oil complex are reports suggesting the Organization of the Petroleum Exporting Countries together with Russia-led partners will consider another production cut when they meet Dec. 4 to balance the market against the backdrop of expanded lockdowns in China. Saudi Arabia and its partners surprised the market last month when they announced a 2 million bpd cutback, drawing anger from U.S. and European leaders who lobbied for more production. Even so, prices have since weakened, with Brent crude slipping to near $80 bbl as the situation in China deteriorated. Last week, Saudi Energy Minister Prince Abdulaziz bin Salman said OPEC+ was "ready to intervene" with further supply reductions if it was required "to balance supply and demand."

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

Liubov Georges