Oil sinks as China’s struggle with covid blights demand outlook
BEIJING: Oil sank again following the biggest weekly decline since August as China tightened curbs against covid-19, hurting the outlook for demand.
Global benchmark Brent fell toward $ 87 a barrel after retreating by almost 9% last week. The country saw its first covid-related death in almost six months on Saturday and another two were reported on Sunday, sparking fears of a further wave of restrictions in the world’s biggest oil importer just as a city of 11 million near the capital asked residents to stay home amid an outbreak.
Goldman Sachs Group Inc. lowered its fourth-quarter forecast for Brent crude by $10 a barrel to $100, according to a note, with the reduction driven in part by the possibility of further measures in China as covid-19 cases climb.
Crude has erased the gains made at the start of the quarter, when the Organization of Petroleum
Exporting Countries and allies including Russia agreed to reduce production by 2 million barrels a day. A looming European Union ban on Russian seaborne flows and Group of Seven price-cap plan are clouding the outlook, with officials possibly set to announce the cap’s level on Wednesday as they step up their response to Moscow’s invasion of Ukraine.
“The market is right to be anxious about forward fundamentals due to significant covid cases in China and a lack of clarity on the implementation” of the price cap, Goldman analysts including Callum Bruce said. Still, for longer-term investors, the drop provides an opportunity to add length, they said.
The market’s weakness is reflected in rapidly softening differentials. Brent’s prompt spread -- the gap between its two nearest contracts -- was 43 cents a barrel in backwardation, down from more than $2 a barrel a month ago. The same gauge for West Texas Intermediate has flipped into contango, a bearish signal that indicates ample near-term supply.
Commodity investors also are concerned that further aggressive monetary tightening will lead to a global economic slowdown, hurting energy consumption. Traders this week will look to minutes of the most recent Federal Reserve policy meeting for more clues on the course of rate hikes.