Monday was a turbulent day for the markets. While headlines were ablaze with Musk’s official buyout of Twitter, it was commodity traders who were suffering the most on Monday. However, the commodity that suffered the most was crude oil. On Monday, prices fell over 4.6%, with West Texas Intermediate prices falling to $97 per barrel while Brent crude hovered around $101.
The main catalyst seems to be the startling rise of Covid-19 cases in China’s capital Beijing, a situation that has prompted mass testing and further lockdown rumors. Chinese stock exchanges, like the Shanghai composite, suffered their worst day of trading since February 2020, with the city reporting a record number of daily deaths.
Since China’s the world’s largest oil consumer, a lockdown would certainly lead to a significant reduction in demand. The last lockdown in China coincided with oil prices tanking from $60 down to $20 and lower, eventually dipping into the negative territory. More widespread China lockdowns could easily push current prices below $90, or even $80 per barrel.
“The ongoing war in Ukraine, COVID-19 lockdowns in China, and surging commodity prices are going to take a significant bite out of global oil demand this year, with the potential to calm high prices,” wrote Claudio Galimberti, senior vice president at Rystad Energy, in a note to clients.
Research groups like Rystad energy predict that oil demand will fall by around 1.4 million barrels per day. What’s more, more researchers now believe that a rebound won’t happen until at least 2023. That’s a far cry from what analysts were saying a month ago, where many predicted oil could surge to $200 per barrel. However, now it seems that sentiments have flipped suddenly to the opposite side.
Oil prices also are being pushed down right now thanks to significant strategic reserves that have been deployed. The Biden administration approved around 180 million barrels worth of oil to be released over a six-month period with 3 million barrels per day. The International Energy Agency also released a total of 50 million barrels over a spread-out timeframe.
Despite ups and downs in prices, it’s been clear that all this extra oil has had a negative effect on oil prices. Additionally, the Ukraine-Russia war seems to not have driven up prices as much as some anticipated. Analysts are now projecting that world average oil demand will hit 99.6 million barrels per day, which is slightly below the pre-pandemic high of 100.2 million barrels per day back in 2019.
Overall, while this is bad news for commodity and energy investors, it’s good news for most Americans. High energy costs have been the main reason inflation has soared, and lower oil could help mitigate that. Drastically lower energy costs could even have a bigger impact than Fed rate hikes in combating inflation.
As expected, oil and gas stocks were in the red on Monday following the news. Companies like Schlumberger (NYSE: SLB), Halliburton (NYSE: HAL), and APA (NYSE: APA) were all down between 8-12%. The S&P energy sector was the worst-performing sector in the markets by a wide margin, with almost every energy stock down at least a few percent.