Oil continued to slide as investors began to grow uneasy with the possibility that China’s sudden abandonment of its “zero-Covid” policy could trigger a new wave of outbreaks across the globe.
US benchmark West Texas Intermediate dropped toward $78 per barrel following a 0.7% lower close on Wednesday.
The drop comes amid news reports indicating China may be facing tens of millions of new Covid cases per day. The government has temporarily stopped the reporting of official case numbers, ostensibly as responsibility for reporting was shifted from one office to another. However reports of overwhelmed medical facilities and an increasingly aggressive outbreak have prompted the United States to require all airline passengers from China show a negative virus test.
Italy meanwhile, announced it would begin testing all arrivals from China, and promptly reported that 50% of passengers from two flights arriving in Milan from China tested positive for the virus. Reports thus far have not specified which strains are spreading in China, or their virulence compared to the less virulent strains which have been predominant in the West. Nor is it clear if the current crop of vaccines have efficacy against the Chinese strains.
The uncertainty about what this will mean for the state of the pandemic, and its effect on the global economy, is overwhelming any investor optimism over the reopening of the world’s second largest economy.
John Driscoll, director of JTD Energy Services Pte in Singapore observed, “The removal of travel restrictions could precipitate another global outbreak. It raises the potential of a demand hit and flattening prices.”
It is possible crude will now see the first back to back quarterly losses since 2019. It is an impressive fall in a volatile year which saw crude first skyrocket off the Russian invasion of Ukraine, and then rapidly fall as fears of inflation and central bank action to cool the world’s economies, led to concerns over a global economic slowdown or even recession. Volatility in the commodity was been exacerbated by a lack of liquidity.
In related news, Dow Jones is reporting the industry-funded American Petroleum Institute has said that last week US commercial crude inventories dropped by 1.3 million barrels. The storage hub at Cushing Oklahoma also saw stockpiles shrink, although the report noted that gasoline and distillates expanded.
Russian President Vladimir Putin signed a presidential decree designed to retaliate against those countries which seek to impose a price-cap on Moscow’s oil exports. The decree will ban all sales to any nation which even mentions the price-cap in any contract.
While analysts feel the decree is not explicitly any more aggressive in its actions than any of the Kremlin’s previous pledges regarding the price-cap, some feel Russia did leave room for a tougher position in the decree. Russian officials have hinted they are looking at a retaliatory reduction in their nation’s crude production of roughly 7% beginning next year.
