Oil Drops on China Coronavirus Concerns

Brent crude futures fell $1.63, or 1.5%, to $105.39 by 1100 GMT after climbing 2.3% on Friday. U.S. West Texas Intermediate (WTI) crude futures declined by $2.17, or 2.1%, to $102.62, paring a 2% gain from Friday.

The market was rattled by news that China had discovered its first case of a highly transmissible Omicron subvariant in Shanghai. New topics had jumped to 63 in the country’s largest city from 52 days earlier.

The discovery of the new subvariant and the highest number of daily new cases in Shanghai since May could lead to another round of mass testing, which would hurt fuel demand.

According to Commonwealth Bank commodities analyst Vivek Dhar, the market’s just responding to news flow, and China has grabbed the most attention so far.

The market remains jittery about plans by Western nations to cap Russian oil prices. Russian President Vladimir Putin warned that further sanctions could lead to “catastrophic” consequences in the global energy market.

JP Morgan said the market was concerned about a potential halt to Russian supplies and a possible recession.

Bank statements

The bank said in a note that macro risks are becoming more two-sided. A 3 million barrel per day retaliatory reduction in Russian oil exports is a credible threat. If realized, it will drive Brent crude oil prices to roughly $190/bbl. On the other hand, the impact of substantially lower demand growth under recessionary scenarios would see the Brent crude oil price averaging around $90/bbl under a mild recession and $78/bbl under a more severe downturn.

Questions also remain about how long more crude will flow from Kazakhstan via the Caspian Pipeline Consortium (CPC).

Supply has continued so far on the pipeline, which carries about 1% of global oil, with a Russian court overturning an earlier ruling suspending operations there on Monday.