Oil prices have fallen below $100 a barrel for the first time in more than two weeks as surging coronavirus cases in China raise concerns about the impact on growth in the world’s second largest economy.
Fears of a downturn in China that could lead to weaker oil demand, combined with an easing of supply worries, helped to push Brent crude, the global benchmark price, down 6.5 per cent to trade at $99.91 a barrel in New York last night, its lowest level since late February.
Brent hit $139 a barrel last week, a price not seen since 2008, as Russia’s attack on Ukraine intensified, prompting the United States to place sanctions on Russian oil and western energy companies to voluntarily stop buying it.
However, worries over the loss of Russian oil supplies have started to ease after Sergei Lavrov, the country’s foreign minister, indicated that it was in favour of the Iran nuclear deal resuming as soon as possible. That would pave the way for sanctions on Iran’s oil sector to be lifted, boosting global supply.
At the same time, India is said to be interested in buying discounted Russian crude shunned by other nations.
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The drop in the oil price came as Chinese stock markets fell sharply overnight for a third session in a row as authorities responded to rising coronavirus cases with lockdowns and other restrictions in line with Beijing’s strict zero-Covid policy. The sell-off also has come amid reports that China is open to supplying Russia with military assistance for its invasion of Ukraine.
The Hang Sang index in Hong Kong closed down 5.7 per cent, while the CSI 300 in China dropped 4.6 per cent. European markets also fell after they opened, but largely regained their losses, with the FTSE 100 closing down by only 0.3 per cent.
Several companies have already shut down operations in affected areas of China and there are concerns about the potential hit to the country’s economy if a wider shutdown persists.
Louise Dickson, senior oil market analyst at Rystad Energy, the consultancy, said: “China oil demand risk is real. It is estimated that a severe lockdown in China could put 500,000 barrels per day of oil consumption at risk.
“The country’s zero-Covid policy is deflationary in the short term as less money is pumped into the economy and less oil is consumed, but on a global scale it creates inflationary supply chain issues as manufacturing and transport hubs lock down.”
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Ole Hansen, head of commodity strategy at Saxo Bank, said: “The sell-off has primarily been driven by the prospect of lower demand as we enter the spring and as millions of Chinese citizens face renewed lockdowns. In addition, last week’s massive jump in diesel has potentially already led to reduced demand, while deeply discounted Russian oil continues to be picked up by non-western countries.”
He added that “the prospect of rising US interest rates from Wednesday has also raised the potential for lower consumption” as the Federal Reserve tries to “orchestrate an economic slowdown in order to curb inflation”.
The oil price fall promises some respite for motorists after prices at the pump hit record highs in recent days.
