Oil Prices Drop Amid China COVID-19 Worries, Reserve Release

Oil Prices Drop Amid China COVID-19 Worries, Reserve Release
Police officers wearing protective gear control access to a tunnel in the direction of Pudong district in Shanghai, which is under lockdown orders, on March 28, 2022. (Hector Retamal/AFP via Getty Images)
Naveen Athrappully
4/12/2022
Updated:
4/12/2022

Brent crude oil fell below $100 per barrel on April 11 due to concerns about COVID-19 lockdowns lowering Chinese demand, as well as fresh supplies pouring into the market from global oil reserves.

Brent oil futures were trading at $98.59 per barrel as of 16:08 coordinated universal time (12:08 p.m. Eastern time) on April 11, 2022, which is 20 percent lower than the previous peak of $123.72 per barrel on March 24.

West Texas Intermediate crude oil futures were trading at $94.36 per barrel at this time.

The oil market is watching the developments in China where COVID-19 lockdowns have been imposed in cities such as Shanghai, a financial center of China that’s home to about 26 million people. Similar curbs have been imposed in regions such as eastern Ningbo and southern Guangzhou.

“Even when the restrictions in Shanghai are lifted, China’s zero-Covid policies will likely remain a drag on demand,” Eurasia Group analysts said to Reuters.
Oil prices have also eased following an announcement by the International Energy Agency (IEA) that its members will release 60 million barrels into the global market. The decision follows Washington’s plan to release one million barrels of oil per day for six months, totaling about 180 million barrels.

The reserves released by the IEA and the United States will total 240 million barrels of additional oil supply into the market. This will be equivalent to adding 1.3 million barrels per day of oil over a six-month period, which analysts at JP Morgan calculate is enough to cover a shortfall of one million barrels per day from Russian supplies. The IEA predicts Western sanctions on Russia will take 3 million barrels per day of oil off the global market.

At present, the United States’ Strategic Petroleum Reserve (SPR) has 564.6 million barrels, which is enough to meet the country’s oil demand for about a month. The IEA requires that America’s SPR be equivalent to 90 days of U.S. crude oil imports, which at 3 million barrels per day would be roughly 270 million barrels in total.

Even after the United States releases 180 million barrels from its reserves, the remaining supply of 294.6 million barrels will be above IEA’s requirements.

However, President Joe Biden’s decision to release oil from the country’s SPR has come under criticism, with experts pointing out that the move will only add to the volatility in the oil market.

“Nobody knows which way the oil price will go,” said Ilia Bouchouev, a partner at Pentathlon Investments and an adjunct professor at New York University. “Doing this will only increase volatility because it reduces the buffer.”
The Bank of Montreal is expecting WTI crude to average $100 per barrel in 2022 and $85 per barrel in 2023, online foreign exchange hub FXStreet reported. Bank of America expects Brent crude oil to average $102 per barrel for 2022–2023.
Reuters contributed to this report.