Oil Sinks as China's Fight With Covid Blights Demand Outlook

Oil Sinks as China’s Fight With Covid Blights Demand Outlook

(Bloomberg) – Oil sank again after the biggest weekly decline since August as China tightened anti-Covid restrictions, hurting the demand outlook.

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The global Brent benchmark fell below $87 a barrel after falling nearly 9% in the past week. The country suffered its first Covid-related death in nearly six months on Saturday and two more were reported on Sunday, raising fears of a new wave of restrictions in the world’s biggest oil importer, as a city of 11 million residents near the capital have asked residents to stay home amid an outbreak.

Goldman Sachs Group Inc. lowered its fourth-quarter forecast for Brent crude from $10 a barrel to $100, a note said, with the reduction partly driven by the possibility of new anti-virus measures in China as the cases increase.

Crude erased gains made earlier in the quarter, when the Organization of the Petroleum Exporting Countries and its allies, including Russia, agreed to cut production by 2 million barrels per day. A looming European Union ban on Russian maritime flows and the Group of Seven’s price cap plan cloud the outlook, with officials possibly set to announce the level of the cap on Wednesday as they step up their response to Moscow’s invasion of Ukraine.

“The market is right to worry about the fundamentals ahead due to large Covid cases in China and a lack of clarity on the implementation” of the price cap, said Goldman analysts, including Callum. Bruce. Still, for longer-term investors, the decline offers an opportunity to add length, they said.

Market weakness is reflected in a rapid easing of spreads. Brent’s rapid spread – the spread between its two closest contracts – was 40 cents a barrel in forward, compared to more than $2 a barrel a month ago. The same gauge for West Texas Intermediate has moved into contango, a bearish signal that indicates abundant supply in the near term.

Commodity investors also fear that further aggressive monetary tightening could lead to a global economic slowdown, hurting energy consumption. This week, traders will look to the minutes from the Federal Reserve’s latest policy meeting for more clues on the course of rate hikes.

“With record Covid cases and declining mobility data in China, it’s hard to find a bull in the paddock,” said James Whistler, managing director of Vanir Global Markets Pte. “Oil markets just can’t shake the bear.”

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