Oil slumps as concerns of new COVID-19 curbs in China and global economic slowdown slash fuel demand
Oil prices fell on Tuesday as fears of new COVID-19 curbs in China, the world's largest importer of crude oil, and fears of a global economic slowdown weighed on the fuel demand outlook.
Brent crude futures for September fell $1.35, or 1.3%, to $105.75 as of 0305 GMT, while West Texas Intermediate (WTI) crude for August delivery was down $1.45 or 1.4% to $102.64 per barrel.
Increasing recession and continuing demand concerns in China are pushing oil prices down despite the current instability of supply-demand balances.
As the highly contagious BA.5.2.1 subvariant has been detected in the country, many cities in China are adopting new COVID-19 restrictions to rein in infections, from business shutdowns to lockdowns. But we'll have to see how that will be handled considering the country's zero-COVID policy.
Overall, demand concerns are driving price movements. However, fundamentals are constructive given the tight supply situation that will continue for the remainder of the year. As a result, the decline in prices is expected to be limited.
The real problem is that Western sanctions against Russia over the war in Ukraine, which Russia refers to as a "special military operation," have disrupted crude oil and fuel trade flows.
There have also been other restrictions on energy supply routes from Russia, a major European supplier of oil, fuel and natural gas, putting traders and utilities in tension.
Concerns about disruption to the Caspian Pipeline Consortium system (CPC) were eased on Monday when a Russian court overturned an earlier decision that suspended operations on the pipeline for 30 days.
However, traders and analysts fear that Russia will suspend the oil pipeline from Kazakhstan to the Black Sea, potentially disrupting 1% of global crude oil supply.
Additionally, reserve capacity in the Organization of Petroleum Exporting Countries is dwindling as most producers pump at maximum capacity.
White House national security adviser Jake Sullivan said on Monday he will sue OPEC for more oil production when US President Joe Biden meets with Gulf leaders in Saudi Arabia this week.
Saudi Arabia is not expected to add significant volumes in the near term as Riyadh will prioritize market management and maintaining spare capacity for emergency losses.
U.S. crude oil and gasoline stockpiles fell last week, while distillate stocks likely rose, according to surveys.
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