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Crude Oil Prices Fall as China Lockdowns Dampen Demand Outlook

Crude Oil Prices Fall as China Lockdowns Dampen Demand Outlook

Margaret Yang, CFA, Strategist

CRUDE OIL PRICE OUTLOOK:

  • WTI crude oil prices pulled back for a second day as China imposed lockdowns and travel bans in a few key commercial hubs amid the worst Covid-19 outbreak in two years
  • This dents the country’s demand outlook, pulling oil prices below the $100 mark
  • Traders are eyeing Russia-Ukraine talks for positive signs, which may pave the way for a ceasefire agreement

Crude oil prices fell for a second day to around $100 bbl during Tuesday’s APAC mid-day session as China – the world’s largest oil importer - imposed lockdowns in a few key commercial hubs amid a new wave of Covid-19 infections. China reported 5,280 new infections on Tuesday, the highest number in two years.

The southern city of Shenzhen was put under lockdown for at least seven days, with more than 17 million people affected. Shenzhen is the technology hub of the Greater Bay Area, and therefore its lockdown will cause global supply chain disruptions and send shockwaves to other countries. Companies such as Foxconn, Toyota and Volkswagen have to suspend operations of their subsidiaries or joint ventures in the city for a few days.

China has also imposed a travel ban on Jilin province, which has a population of 24 million. Access to the financial hub of Shanghai has been restricted as well. Local governments are implementing stringent social distancing measures and travel bans in an effort to contain the rapid spread of the Omicron variant. Beijing seems to be prioritizing its zero-Covid policy over economic growth, rendering crude oil prices vulnerable to a deeper pullback if the pandemic situation in China worsens.

China is the world’s largest oil importer, spending $176 billion on purchasing the dark liquid in 2020. The country alone accounts for a quarter of global oil imports, therefore its economic development tends to have an outsized impact on energy demand. The prospect of lengthy lockdowns in Chinese cities may cast a shadow over crude oil prices in the weeks to come.

Meanwhile, oil traders are eyeing Russia-Ukraine talks as both sides have signalled positive shifts in negotiations over the weekend. Ukraine negotiator Mykhailo Podolyak said that “Russia is already beginning to talk constructively” and “we will achieve some results literally in a matter of days”. This brightened the prospect of a ceasefire agreement and may pave the way for a deeper pullback in oil prices.

WTI Crude Oil Price vs. China Oil Imports

Crude Oil Prices Fall as China Lockdowns Dampen Demand Outlook

Source: Bloomberg, DailyFX

Technically, WTIpulled back sharply after hitting a multi-year high last week. Prices have likely entered a deep technical correction as buyers look for profit-taking. An immediate support level can be found at around 96.70 – the 61.8% Fibonacci extension. Breaking this level exposes the next resistance level of $94.30. The MACD indicator has formed a bearish crossover and trended lower, suggesting that bearish momentum may be dominating.

WTI Crude Oil PriceDaily Chart

Crude Oil Prices Fall as China Lockdowns Dampen Demand Outlook

--- Written by Margaret Yang, Strategist for DailyFX.com

To contact Margaret, use the Comments section below or @margaretyjy on Twitter

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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