Crude Oil Prices Fall as China PMIs Flag Collapsing Demand

© Reuters.

By Geoffrey Smith

AiVIF.com -- Crude oil prices fell sharply on Monday in response to fresh data detailing the Chinese economy’s struggles with Covid-19.

By 10:25 AM ET (1425 GMT), U.S. crude futures were down 2.8% at $101.75 a barrel, while Brent futures, the global benchmark, were down 2.6% at $104.32 a barrel.

U.S. RBOB gasoline futures were likewise down 1.1% at $3.4043 a gallon.

Moves were exaggerated by the thin liquidity, with London markets shut for a public holiday and U.S. intermediaries increasingly struggling with the rising cost of running open positions due to tightening conditions in the money markets as the Federal Reserve prepares to raise interest rates sharply.

Open interest in futures contracts monitored by the CFTC fell another 13 million barrels last week, taking the total decline in open interest since mid-February to 1.14 billion barrels.

Over the weekend, China’s official purchasing managers indices (PMIs) showed both the manufacturing and services sectors in sharp contraction in April as Shanghai (home to the world’s largest port), the region of Jilin and other cities and provinces all suffered under varying degrees of restrictions.

The lockdowns have had a debilitating effect on Chinese demand, with Citigroup head of commodities research Ed Morse telling Bloomberg on Monday that average demand in the world’s biggest importer has fallen by more than 1 million barrels a day so far this year. Current OPEC forecasts see Chinese demand growing by 700,000 barrels a day this year, something that the ongoing lockdowns will make highly improbable, if they endure.

“It doesn’t look like it’s going to come back any time soon,” Morse said. “We think they’re going to keep the blockage on international travel through the end of the year.”

The demand shortfall in China is helping to take the edge off what has become an increasingly dysfunctioning supply side. A Reuters survey published on Monday showed that the Organization of Petroleum Exporting Countries’ members had again failed to meet their commitments to raise output under their joint production schedule with Russia and others.

OPEC members were supposed to ship an extra 254,000 barrels a day in April under that deal, but instead only managed an increase of 40,000 barrels a day, due to a host of above-ground problems in Libya, Nigeria, Angola and others.

Supply from Russia is also expected to have fallen sharply toward the end of the month due to its export terminals and pipelines being unable to accept fresh production.

The so-called “OPEC+” group meets on Thursday to discuss its output level for June. No change to policy is expected, but the failure of some to meet their quotas is raising the incentive for those that can pump more to break with the agreement.

OPEC+ will likely have to take stock of the outcome of an EU Energy Ministers’ meeting in Brussels currently ongoing, which is expected to draft the outline of a phased embargo on Russian oil imports. According to various reports, the ministers are expected to outline an end to purchases of Russian crude and refined products by the year end, with exceptions carved out for Slovakia and Hungary, which are more dependent than other member states on Russian pipeline deliveries.