Oil prices plunged about $6 on Monday as concerns over slower fuel demand in China grew after authorities in Shanghai said they would shut the country’s financial hub for a COVID-19 testing blitz over nine days.
The market kicked off another week of uncertainty, buffeted on one side by the ongoing war between Ukraine and Russia, the world’s second-largest crude exporter, and the expansion of COVID-related lockdowns in China, the world’s largest crude importer.
U.S. West Texas Intermediate (WTI) crude futures hit a low of $105.70 a barrel, and were down $6.91, or 6.13%, at $105.80.
Both benchmark contracts rose 1.4% on Friday, notching their first weekly gains in three weeks, with Brent surging more than 11.5% and WTI climbing 8.8%.
“Shanghai’s lockdown prompted a fresh sell-off from disappointed investors as they expected such a lockdown would be avoided,” said Kazuhiko Saito, chief analyst at Fujitomi Securities Co Ltd.
He added the market had factored in the impact of a missile attack on a Saudi oil distribution facility last Friday.
“Still, as OPEC+ is less likely to raise oil output at a faster pace than the recent months, we expect the oil market to turn bullish again later this week,” he said.
Shanghai’s city government said on Sunday all firms and factories would suspend manufacturing or have people work remotely in a two-stage lockdown over nine days, after the city reported a new daily record for asymptomatic COVID-19 infections.
Sapping fuel demand further, public transport, including ride-hailing services, will also be suspended during the lockdown.
On Friday, Yemen’s Houthis said they launched attacks on Saudi energy facilities and the Saudi-led coalition said Aramco’s petroleum products distribution station in Jeddah was hit, causing a fire in two storage tanks but no casualties.
The Organization of the Petroleum Exporting Countries (OPEC) and allies, known as OPEC+, are due to meet on Thursday.
OPEC+ has so far resisted calls from major consuming nations, including the United States, to step up an output boost. The group have been raising output by 400,000 barrels per day (bpd) each month since August to unwind cuts made when the COVID-19 pandemic hit demand.
To help ease tight supply, the United States is considering another release of oil from the Strategic Petroleum Reserve that could be bigger than the sale of 30 million barrels earlier this month, a source said.
“Additional release, however, may cause fears of a shortage of already-lower inventories which will limit further release in the future,” Fujitomi’s Saito said.
Global stockpiles are at their lowest since 2014.