China's Covid policy is gripping the oil market. Several lockdowns in major cities led to a sharp drop in oil prices in mid-November. Now that China seems to be easing their covid measures, the price of Brent oil rose again just as quickly. Although this price increase was also reinforced by pressure on the international oil supply.
These are turbulent times in the oil market. After the price of Brent oil fell sharply in mid-November, a sharp correction took place this week. On Monday, November 25, the oil price was at its lowest level since early October at $83,71. On Thursday, December 1, the oil price was back at the level of the beginning of last week. A barrel of oil at that time cost $88,08.
The increase in oil prices is partly caused by shortages on the supply side of the market. In the United States, oil reserves decreased by 13 million barrels this week. US oil reserves have not shrunk so much since June 2019. In addition, analysts are watching the Middle East with anticipation, because new intervention by OPEC is certainly not excluded.
About a week ago, the price of oil was approaching the point where the cartel intervened. On October 5, OPEC+ (the partnership between the OPEC countries and Russia) decided to reduce their production targets by 2 million barrels. According to the member countries, the oil price became so low that it was no longer profitable for some countries to pump the fuel. Russia in particular got into trouble. Due to the war in Ukraine, the country has to sell their oil at heavy discounts.
It remains to be seen whether a new intervention will be beneficial for the OPEC countries. Due to lagging demand, this drastic intervention has not yet led to the price level desired by OPEC. A new intervention is risky because the higher price may not outweigh the lower sales volume. This could well reduce total revenues for the OPEC countries.
China has a grip on the market
News from China in particular is causing the turbulent prices on the oil market. The large drop in oil prices in mid-November was the direct result of stricter Chinese Covid policies. Now that winter is approaching, the number of infections in the country is increasing again. The rapid spread of the virus has now led to large parts of the megacities Beijing and Guangzhou being placed back into lockdown. This is bad news for the oil industry. Because China has the most oil processing companies in the world, disruptions in the country directly lead to lower oil prices.
Meanwhile, the Chinese population no longer seems to tolerate the lockdowns passively. Partly due to images of stadiums full of fans without face masks at the World Cup, Chinese people are becoming increasingly aware that the rest of the world has released their lockdowns. Since the largest district of Guangzhou was placed in lockdown, there has been unrest in large parts of China. Demonstrations are taking place on a large scale and the Chinese authorities have so far proven unable to suppress the protests.
There are now cautious signals that the demonstrations are proving effective. Although the demonstrations are not mentioned as motivation, the Chinese government has announced that it will relax Chinese Covid measures. For example, Chinese people will soon no longer have to spend part of their quarantine in a Covid hotel. In addition, the government decided to lift various lockdowns. The hope now prevails that China will further abandon their strict Covid policy. The easing of Covid measures immediately led to a 5% increase in the oil price in just two days.
After a long period of declines, the price of diesel is also on the rise. On Monday, November 28, diesel was at its lowest point since September 30 at €133,49. On December 1, the diesel price had increased by 2,8% to €137,33.