Oil slumps as China’s worsening Covid-19 outbreak raises demand concerns

Oil resumed its decline as China’s virus resurgence worsened, raising concerns about demand from the world’s biggest crude importer.

West Texas Intermediate futures slid below $96 a barrel after climbing 2.3% on Friday, the first gain in four sessions. Virus cases continue to rise in Shanghai and there is no clarity on when restrictions will be lifted. The flare-up has led to disruptions at ports and prompted some refiners to trim operating rates.

Oil has now given up most of the gains seen since Russia’s invasion of Ukraine in late February following a tumultuous period of trading. The war has fanned inflation and prompted the US and its allies to release strategic reserves to cool prices. Fighting continues despite diplomatic efforts for a cease-fire.

Shanghai reported a record of more than 26,000 new cases on Sunday and the southern metropolis of Guangzhou is implementing a series of restrictions, with China struggling to halt the spread of the highly infectious omicron variant as it pursues its Covid Zero strategy. Oil analysts are continuing to cut their demand forecasts as the outbreak curbs travel.

Factory gate prices in China rose more than expected last month as oil climbed, putting pressure on manufacturers that are already struggling to operate amid repeated virus outbreaks.

“There seems to be no end in sight for the current lockdowns, and clearly the longer this goes on, the more of a demand hit we will see,” Warren Patterson, head of commodities strategy at ING Groep NV in Singapore. “While the amount of impacted Russian supply is smaller-than-expected at the moment, this could change very quickly if the situation in Ukraine deteriorates further.”

Brent remains in a bullish backwardation structure -- where near-dated contracts are more expensive than later-dated ones -- although it’s eased over the past week. The prompt timespread for the global benchmark was 61 cents a barrel in backwardation, compared with $1.53 a week ago.

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