Oil Oscillates on Rumors and China Covid Controls
Oil prices swung down and right back up in Monday’s session among reports that OPEC+ was considering an output increase. Oil futures dropped nearly $5 per barrel on the news until Saudi Arabia rejected the news, as did Kuwait. The front month contract finished slightly down Monday and continued to rise into Tuesday’s session.
Demand in China remains at the forefront of investors’ minds as new Covid-19 outbreaks encourage Chinese officials to continue with lockdowns and movement restrictions – reversing previous directives to ease restrictions in the official Covid Zero playbook. According to Ole Hansen, head of commodities strategy at Saxo Bank, “Demand concerns, however, broadly remain with rising virus cases in China.”
There were 27,307 new cases recorded in China for Monday, just under the previous record of 28,973 in April. Guangzhou, the southern manufacturing hub, is the epicenter of the current Covid-19 wave. Local authorities have reintroduced measure including expanded testing and shutting offices and school in big cities. Top health officials pledged to maintain Covid Zero Tuesday stating outbreaks remain “severe and complex.” Beijing has told local governments to implement the updated guidelines outlined earlier this month that controls should not be excessive but also shouldn’t be too loose either according to Mi Feng of the National Health Commission.
A total of 48 Chinese cities are currently subject to some level of movement restrictions according to Nomura Holdings Inc. analysts. Their chief China economist Lu Ting said that almost one fifth of China’s total economic output is affected by the controls. This is up from 15.6% a week prior. The Goldman Sachs Effective Lockdown Index has also climbed last few weeks.
The European Union will impose a ban on seaborne imports of Russian crude oil on December 5th. At the same time the EU and UK will prohibit their firms from providing shipping, trade finance or insurance for tankers that carry Russian oil unless the shipments are priced below a cap. The price cap will be set by a coalition including the Group of Seven governments and the EU. China and India have stated they will continue to purchase Russian oil. Treasury Secretary, Janet Yellen, commented that “Some people feel Russia will not have trouble finding non-Western ships and services. That’s not our best guess… They’re going to be looking for buyers, and we think they’re going to have a hard time selling all of it.” She estimates there will be some oil stuck in Russia if Russia is not willing to accept a price at or below the price cap. This could cause a further shortage of oil supply.