Brent and WTI prices have wiped off the entire 2022 gains. Both benchmarks underwent three consecutive weeks of decline, for one reason or another – and are now trading at their lowest since December 2021. This looked far fetched two months ago, when the likes of Goldman Sachs and JP Morgan were predicting $120/bbl by the end of year.
What the rate cut by US Fed could not achieve, the rise in Covid cases in China seems to. Or at least beginning to. The supply side realities have not altered from last quarter, but demand dynamics have started to show cracks. Some of if is real, and some orchestrated. It was a week ago, when big US media houses started to spread rumors of a possible increase in production by Opec Plus – just a month after the historic cut in October.
Sure enough, Saudi Arabia rubbished the claims, but the fake news had already dented the oil futures by 5 percent in one trading session. The lost ground was regained in the following days, as it made little sense for the cartel to go reverse the production cut so close the planned meeting, and in a scenario where demand was also weakening and prices softening.
But this time around, the bear run is based on a more realistic scenario that is being played out in Mainland China. Chinese daily Covid cases are at the highest since the start of pandemic, and the unprecedented protests have thrown the spanner in the works. A nationwide lockdown may sound farfetched but is something that observers have not completely ruled out. The daily traffic data from big centers show a drop in excess of 40-50 percent – which at times carry more weightage in oil market news than longer term fears of global recession.
The US has also eased some of its oil sanctions on the regional giant Venezuela, after a deal between the government and opposition. That said, nobody is ruling out a bigger response from Opec Plus in an attempt to keep the supply tight, in the wake of falling prices and fear of reduced demand from China.
How long will demand from China stay off the market is anybody’s guess – but one must not lose sight of the fact that Western media has often times overplayed the demand concerns emerging from China. Most times, Chinese oil demand has emerged faster and stronger than most predictions originating from the US market movers.