Shortly before 8 a.m., Brent dropped 1.19% to 104.68 dollars, after plunging Monday evening by not far from 6% to 105.94 dollars.
Oil prices continued to decline on Tuesday after the fall suffered the previous evening, a reflection in particular of the renewed strength of the dollar. Investors are doubling their concerns about a possible recession linked to China, but also about the slowdown of other economies.
Shortly before 8:00 a.m., a barrel of Brent from the North Sea for July delivery dropped 1.19% to 104.68 dollars, after plunging Monday evening by not far from 6% to 105.94 dollars. As for the 159 liters of American West Texas Intermediate (WTI), they were trading at $101.94, down 1.12%, after tumbling 6.08% to 103.09 the previous evening.
The oil market is spooked “by fears of a slowdown in Chinese demand and the prospect of rising interest rates around the world,” said Victoria Scholar, an analyst at Interactive Investor. China’s exports experienced an unprecedented slowdown in April since 2020, against a backdrop of containment in Shanghai which is heavily penalizing activity and the tightening of health restrictions in Beijing.
“The deterioration of the situation in China and the stubbornness of the government of President Xi Jin Ping to maintain a mission impossible (the zero Covid policy) will probably cost the country and the world economy more in terms of growth and demand for oil in the coming months,” said Ipek Ozkardeskaya, an analyst at Swissquote Bank.
“The likelihood that the current containment measures will lead to the eradication of the virus in China and therefore to safe reopenings seems very, very slim”, also underlines Bjarne Schieldrop, analyst at Seb. “Logic dictates that any reopening will be followed by a new outbreak of infections, then new closures, as long as politicians stick to the current scenario” of zero Covid, argues the analyst.
China is the second largest consumer and largest importer of crude oil in the world. Data released on Monday nevertheless showed that Chinese oil imports increased in April (+0.7%) compared to March.
Demand rather than supply
“I think it’s more the dollar” which is involved in the slide in the price of black gold on Monday, said Stephen Schork, analyst and author of the Schork Report. The dollar index, which measures the evolution of the greenback against a basket of major currencies, thus reached its highest level for more than 19 years.
“Essentially, commodities are denominated in dollars,” the analyst recalled, “so the stronger it is, the more expensive commodities are for economies whose currency is not the dollar.” The yuan notably fell on Monday to its lowest level since October 2020 against the dollar, while the yen, the currency of another major oil importer, Japan, returned to depths more frequented for twenty years.
Observers are ignoring for now the prospect of an EU embargo on Russian oil, which drove the market last week, as well as Japan’s commitment over the weekend to cease its own Russian imports. The latter represent only 4% of the total black gold purchased by the country of the rising sun abroad.
In addition, on the American market, there are still signs of unprecedented tensions on refined products. Diesel again broke its historic record on Monday at 5.54 dollars per gallon (3.78 liters), up 78% over one year.
In a context of extreme volatility, “it’s a race between recession and reduction of supply”, each factor taking, in turn, the upper hand over the other and dictating the direction of prices, according to Stephen Schork. “But going into the week, markets are focused on supply destruction and recession.”