Oil prices tumbled about 7% on Monday after China’s financial hub of Shanghai launched a lockdown to curb a surge in COVID-19 infections, prompting renewed fears of demand destruction.
Brent crude futures fell $ 8.17, or 6.8%, to settle at $ 112.48 a barrel. US West Texas Intermediate (WTI) crude futures fell $ 7.94, or about 7%, to settle at $ 105.96 a barrel.
Crude futures have been volatile since Russia’s invasion of Ukraine in late February. Last week, Brent gained nearly 12%, while WTI rose almost 9%.
Shanghai has entered a two-stage lockdown of 26 million people on Monday in an attempt to curb the spread of COVID-19. Officials closed bridges and tunnels and restricted highway traffic.
“The fear that the lockdowns could spread combined with a long liquidation has resulted in further decline of the market,” said Andrew Lipow, president of Lipow Oil Associates in Houston.
Oil demand in China, the largest crude importer globally, is expected to be 800,000 barrels per day (bpd) softer than usual in April, said Bjarne Schieldrop, chief commodities analyst at SEB bank.
Hopes for progress in peace negotiations between Russia and Ukraine, which could start in Turkey on Tuesday, also weighed on prices.
However, analysts expect more bullish sentiment when the Organization of the Petroleum Exporting Countries (OPEC) and allies, collectively known as OPEC +, meet on Thursday to discuss a planned 432,000-bpd increase to production quotas.
OPEC + will likely stick to its plans for a modest increase in its oil output in May, several sources close to the group said, despite a surge in prices due to the Ukraine crisis and calls from consumers for more supply.
Supply deficits are looming, meanwhile, with April spot volumes of Russian crude expected to struggle to find buyers, analysts said. Russia’s crude flows have been little affected in March as most volumes were contracted before the conflict.
Declining orders for Russian oil will be replaced with contracts from Southeast Asian countries, Russian state news agency TASS cited Kremlin spokesman Dmitry Peskov as saying on Monday.
Countries such as India and China are still buying Russian crude and Indonesian state energy company PT Pertamina has become the latest to announce it is considering buying Russian oil.
However, analysts still expect oil markets to feel the effects of widespread avoidance of Russian oil.
“Expectations are that 2.5 m bl / d of Russian crude and products will be lost in April,” SEB’s Schieldrop said, adding that diesel shortages will increase demand for Brent crude and light sweet crudes.
Oil should not be withheld from any country because “the world is in dire need” of supplies, UAE energy minister Suhail al-Mazrouei said on Monday.
OECD stockpiles are at their lowest since 2014.
To help ease tight supply, the United States is considering another release of oil from the Strategic Petroleum Reserve (SPR), but it could be limited given the already low inventories.