Oil drops below US$95 on potential Iran deal, China lockdowns

LONDON (March 15): The oil rally deflated on renewed hopes of an Iran nuclear deal, while a resurgence of Covid lockdowns in China posed risks to demand.

Futures in New York were trading near US$95 a barrel, falling more than US$9 on Tuesday to the lowest since the start of the war in Ukraine. Oil lost more than 20% in a tumultuous trading week that saw wild price swings and historic volatility.

In the latest booming market developments, Russian Foreign Minister Sergei Lavrov said sanctions against his country would not affect the Iran nuclear deal, sparking optimism that the possibility to revive the agreement. A resurgence in Covid-19 cases in China, the world’s largest importer of crude, has posed risks to global demand.

“Supply shortage fears have eased considerably due to the short-term impact of demand given China’s lockdowns,” said Ed Moya, senior market analyst at Oanda.

With concerns still looming that the disruption in Russian oil flows could squeeze an already tight market, OPEC was quick to stress that there was no shortage. In its monthly report, the cartel took an unusual step by acknowledging that the war threatens to intensify soaring global inflation. British Prime Minister Boris Johnson is expected to visit the United Arab Emirates and Saudi Arabia this week in a bid to secure more oil. Key cartel members resisted pressure from the United States, Japan and European countries to speed up production increases.

China’s latest virus outbreak, with growing clusters spawned by the highly infectious omicron variant in some of its most developed cities and economic areas, is an unprecedented challenge to the country’s Covid Zero strategy. The nation injected more funds into the financial system and set a lower-than-expected benchmark rate for the yuan, seeking to support the economy.

The market is also in the midst of a liquidity crunch, leaving prices vulnerable to sharp swings. Clearinghouses increased their margins – making it more expensive to trade the same amount of oil – and open interest slumped to the lowest since 2015. The spread between bids and offers for the WTI was at times six cents on Tuesday – it would typically only be about half that amount – another sign of a less active market.

As buyers continue to shun Russian crude, there are signs that exports may not be completely halted as some transactions recede from the public eye. Surgutneftegas PJSC is offering financing flexibility to some customers to keep crude flowing, while India is developing a mechanism to facilitate trade using local currencies. Yet the value of Russian Urals crude continues to fall.

The realization that Europe is unlikely to immediately wean itself off Russian oil is a key driver of crude’s “dramatic” crash over the past week, said Fawad Razaqzada, market analyst at ThinkMarkets. “Everything else is secondary, including the potential return of Iranian oil supplies,” he said.

Prices:
West Texas Intermediate for April delivery fell US$8.54 to US$94.47 a barrel at 11:47 a.m. New York.
Brent for May settlement slid US$8.07 to US$98.83 a barrel.

Russia’s invasion of Ukraine has rippled through markets, stoking inflation as governments try to spur post-pandemic growth. UK lawmakers have been told by consultant Energy Aspects Ltd that Britain may have to ration commodities like natural gas and diesel if the war continues. Consumers are already feeling the pain at the pump, with transportation fuel prices rising around the world.

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