Oil headed for a back-to-back weekly retreat on plans for massive stockpile releases, a demand-sapping virus outbreak in top importer China and a hawkish turn from the US Federal Reserve.
West Texas Intermediate traded above $96 a barrel, with prices about 3% lower this week. The recent drop means the U.S. benchmark has now lost most of the gains seen since Russia’s invasion of Ukraine began in late February.
Alarmed by the surge in energy costs spurred by Moscow’s assault, Washington and allies have announced plans to sell almost a quarter-of-a-billion barrels from strategic petroleum reserves. With the move supported by France, the U.K. and others, that’s prompted a collapse in once-elevated time spreads.
Crude prices — which remain more than a quarter higher year-to-date — have also been hurt this month as China ordered a series of lockdowns in key urban centers including Shanghai to quell a coronavirus outbreak. At the same time, plans by the Fed for an aggressive tightening of U.S. monetary policy to combat inflation have blunted demand for risk assets and boosted the dollar.
“At some point, the sentiment-driven sell-off will give way and fundamentals will reassert themselves,” said Stephen Innes, managing partner at SPI Asset Management Pte, adding that deficits are likely to persist. More market participants will “start fretting about how will the U.S. administration replenish the SPR drawdown,” he said.
- West Texas Intermediate for May delivery rose 0.3% to $96.27 a barrel on the New York Mercantile Exchange at 7:01 a.m. in London.
- Brent for June settlement was 0.1% higher at $100.65 a barrel on the ICE Futures Europe exchange.
While many western companies are shunning Russian oil following the invasion, there are plenty of willing takers in Asia, especially in China and India. Cargoes of Russian Sokol crude from the Far East have sold out for next month.
Oil markets remain in backwardation – a bullish pattern marked by near-term prices above longer-dated ones – but differentials have collapsed. Brent’s prompt spread, the difference between its two nearest contracts, has plunged to 60 cents a barrel in backwardation from more than $3 two weeks ago.
China’s latest coronavirus outbreak shows no sign yet of abating, disurupting Asia’s largest economy. Cities including the commercial hub of Shanghai are facing severe restrictions, curbing mobility and energy consumption.