Crude Oil Weakens; China's Demand Concerns Weigh

© Reuters.

By Peter Nurse

AiVIF.com -- Oil prices drifted lower Tuesday as traders weighed up concerns about demand destruction as China’s Covid outbreak expands to Beijing, with the potential for a possible European oil embargo on Russia.

By 8:45 AM ET (1245 GMT), U.S. crude futures traded 1% lower at $104.10 a barrel, while the Brent contract fell 1% to $106.48 a barrel. 

U.S. Gasoline RBOB Futures were down 1.3% at $3.4658 a gallon.

Daily Covid cases in China's capital, Beijing, are now numbering in the dozens, and authorities are mandating mass tests while keeping schools closed.

Beijing is desperate to prevent an outbreak from spiraling into a crisis like the one in the financial hub of Shanghai, where most people are still unable to leave their homes after more than a month of confinement.

China is the largest importer of crude in the world, and the second largest consumer, and the limited economic activity associated with these lockdowns could have a significant impact on overall demand in the month of May.

That said, the ongoing war in Ukraine and the associated sanctions on Russia continue to provide underlying support for the market. Oil hit multi-year highs this year, with Brent reaching $139 in March, the highest since 2008.

BP does not expect any significant falls in oil prices in the near term as the volume of Russian oil impacted by Western sanctions is likely to double, Chief Executive Officer Bernard Looney said Tuesday.

"There is one million barrels a day of Russian crude off the system today... We think that will probably double this month, when existing sanctions come into effect," Looney said.

Additionally, the European Union is expected to firm up plans to tighten sanctions on Russia this week, potentially agreeing to an embargo on Moscow’s oil.

There has been disagreement within the bloc over whether to take this next step, but expectations are rising with Germany, the union’s largest economy and de facto leader, saying it was prepared to back an immediate embargo. A deal could include exceptions for Hungary and Slovakia, both heavily dependent on Russian oil imports.

“If the embargo is placed on Russian oil, we expect oil prices to pick up more volatility,” said Naeem Aslam, an analyst at AvaTrade.

“However, the devil is always in the details and that means if the embargo does apply, the most important factor to note will be when that embargo takes place, as it is also highly anticipated that sanctions against Russian oil will not go into effect immediately,” he added.

The latest U.S. inventory data from the American Petroleum Institute industry group are due later in the session, as a precursor to government data from the Energy Information Administration on Wednesday.