Brent oil falls 4% after Shanghai’s “two stages” Covid lockdown

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Vrasidas Neofytou
Head of Investment Research

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Brent oil falls 4% after Shanghai’s “two stages” Covid lockdown

The new trading week got off to a shaky start for crude oil prices following the reports of recent “two stages” lockdown in Shanghai, China’s largest financial and commercial hub, in a scramble to contain the worst Covid outbreak since 2020.

China’s administration following its “zero-Covid” policy, ordered all public transit in the city to be suspended starting from Sunday, together with the suspension of manufacturing from local factories and services activities over the next nine days.

According to the “two stages” lockdown plan which uses the Huangpu River that passes through the city as a guide, the districts to the east of the river will be locked down and tested between March 28 and April 1 and the other half between April 1 and 5, while the city’s port, which is the largest in the world, would continue to operate to mitigate the economic damage from the latest lockdowns.

The city, which has a population of more than 25 million people, reported a new record number of 2,631 infections on Saturday, mostly asymptomatic cases, with China suffering its worst Covid outbreak since the virus first emerged in Wuhan more than two years ago.

On top of that, Anthony Fauci, America’s chief medical adviser to the U.S. president Joe Biden, has warned that we should be prepared for future social restrictions in case of higher hospitalizations as Covid-19 cases have gone up around the world, driven mostly by the Omicron subvariant BA.2, according to the data.

Market reaction:

Crude oil prices hit the most following latest Shanghai’s lockdowns, as energy traders worry that the fresh lockdown measures in China, the world’s largest crude importer with approx. 10 million barrels per day, or 10% of global demand, could slow down the economic and mobility activity, hammering the demand growth outlook for petroleum products.

Brent crude contract, 1-hour chart

As a result, Brent and WTI crude oil prices fell to as low as $115/b and $108/b respectively on Monday morning, or down 4%, offsetting some of their 10% gains from the preview’s week.

Brent oil prices climbed to as high as $123/b last week following the Western sanctions on Russia, the world’s second-largest exporter behind Saudi Arabia, with nearly 8 million barrels per day of crude and distillate products, in retaliation for its invasion of Ukraine.

Crude oil prices were also supported by the suspension of the major oil pipeline of the Caspian Pipeline Consortium network after damages from a recent storm in the area, which carries up to 1,4 million barrels per day from the massive Tengiz oilfield in western Kazakhstan to the major port of Novorossiysk on Russia’s Black Sea coastline.

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