Oil drops to below $100, shedding more than 20%
LONDON: The heat is coming out of the oil market, and fast. West Texas Intermediate oil futures dropped below $100 a barrel on Tuesday, having shed more than 20% in a tumultuous week of trading that’s seen wild price fluctuations.
The latest developments to rattle the market are a resurgence of covid-19 cases in China, the world’s biggest crude importer and what appears to be progress in ceasefire talks between Ukraine and Russia. There are still concerns that the disruption to Russian oil flows is squeezing an already tight market, the Organization of the Petroleum Exporting Countries, and others have been quick to point out there is no shortage.
The market is also in the midst of a liquidity crunch, leaving prices vulnerable to big swings. Clearing houses have been increasing margins, effectively making it more expensive to trade the same amount of oil -for and open interest has collapsed to the lowest since 2015. The gap between bids and offers for WTI was six cents at times on Tuesday, it would usually only be about half that amount-- another sign of a less active market.
China’s latest virus outbreak, with growing clusters spawned by the highly infectious omicron variant in some of its most developed cities and economic zones, is an unprecedented challenge the country’s Covid Zero strategy. The nation injected more funds into the financial system and set a weaker-thanexpected reference rate for the yuan, seeking to support the economy. “Risk premium seems to evaporate swiftly from oil prices,” said Norbert Ruecker, an analyst at Julius Baer. “The pandemic and health restrictions weigh on China’s economic outlook and thus oil demand.”
Buyers still shun Russian crude, but there are signs that exports might not be completely cut off as some deals retreat from the public eye. Surgutneftegas PJSC is offering financing flexibility to some customers to keep crude flowing, while India is working out a mechanism to facilitate trade using local currencies.
Ukraine’s main negotiator said the two sides were working on a potential ceasefire before talks were paused to take stock. The US and China also had a “substantial discussion” in their first high-level meeting on the war.