Oil Declines to Lowest Level Since March Following IEA Announcement, Lockdowns in China, and Strengthening Dollar

Oil Declines to Lowest Level Since March Following IEA Announcement, Lockdowns in China, and Strengthening Dollar
FILE PHOTO: Smoke spews from chimneys of an oil refinery in Nanjing, east China's Jiangsu province, December 28, 2006. REUTERS/Sean Yong
Naveen Athrappully

Oil settled lower for a third straight session supported by the news of a coordinated effort by member states of the International Energy Agency (IEA) to release 60 million barrels into the global marketplace, renewed lockdowns in power-hungry China, indecision in Europe, and a strong dollar.

Brent started April 6 trading at $106.16, and dropped to $100.10 as of 9:30 a.m. ET. West Texas Intermediate (WTI) crude futures likewise lowered more than 5.7 percent over two days and is trading at $96.22 a barrel. Both benchmarks have plunged to their lowest since mid-March.

COVID-19 restrictions and lockdowns in China—the biggest importer of oil globally—had eased upward pressure on the commodity. Complete city-wide shutdowns are part of the draconian measures implemented under the country’s Zero-COVID policy.

The drastic containment actions have radically disrupted the day-to-day lives of its citizens and had a profound impact on the region’s economy. Recent outbreaks of the Omicron variant have resulted in economists at Morgan Stanley slashing their 2022 China GDP forecast to 4.6 percent from the earlier 5.1 percent.
Oil market jitters have been temporarily assuaged by the recent announcement from the IEA. The international move follows the Biden administration’s announcement last week that it will release 1 million barrels on average into the market every day for the next six months, which amounts to almost 180 million barrels in total.

Analysts have largely dismissed the coordinated release, saying the war-time reserves will have a transient effect on the markets and won’t have any significant impact on prices in the long run.

The Federal Reserve’s hawkish stance regarding inflation, and restricting of financial liquidity through the shrinkage of its balance sheet, has contributed to the recent strengthening of the U.S. dollar, which has risen by four percent this year against other major currencies. Half of that increase came in March.

As the majority of oil transactions are done in U.S. dollars, the upward movement of the currency has an inverse impact on oil.

Oil prices have also been affected by uncertainties surrounding unified European sanctions on Russian energy imports. The continent imports 45 percent of its gas from Russia.

However, the latest round of sanctions on Russia includes restrictions on purchases of coal. This is the first time the continent has moved toward banning energy imports and could be an indicator of similar sanctions in the future that may impact oil and gas purchases.

“We have further coordinated robust sanctions,“ said EU Council President Charles Michel during a Wednesday debate in the European Parliament. ”The new package includes a ban on coal imports. And ladies and gentlemen, I think that measures on oil and even gas will also be needed sooner or later.”

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