Unrest continues to dominate the oil market. After a period of strong price increases, the oil price fell at a rapid pace this week. The Chinese government announced this week that it would not change its zero covid policy. As a result, the prospect of an upturn in demand from that country is out of sight. In addition to crude oil, diesel is also becoming cheaper as a result of the low prices of Russian oil.
On Friday, November 4, the price for a barrel of Brent oil was still at its highest point since the end of August. The price of a barrel of crude oil at that time was $98,57. However, the news out of China completely offset the price gains of the past three weeks. The price fell by about 6,5%. On Thursday, November 10, the price dropped to $92,18.
The fact that prices rose until November 5 is mainly the result of a low supply on the world market. In September, the oil price fell due to declining demand. Therefore, OPEC+ decided on October 5 to lower their production targets by 2 million barrels. Because several countries of the cartel did not meet their targets before October 5, the production decrease is lower. Yet the member countries pump up a lot less oil. It is estimated that the production of the member countries decreased by 1 million barrels per day.
Not only lower production caused a high oil price. The fear of a further decline in supply also kept the market in its grip. The European Union will stop importing Russian oil from December. This export freeze puts considerable pressure on the availability of oil in the EU. So far, the European Union and Great Britain have reduced their imports by only 35%. Before the war, the EU imported 2,6 million barrels of oil from Russia. In mid-October, imports from Russia still amounted to 1,7 million barrels.
Demand from China in particular remains low
The fact that the oil price is now falling again is due to news from China. Until this week, analysts expected demand from China to pick up again in the near term. Normally China is one of the world's largest importers of oil, but due to the strict lockdown policy, the demand from the country is a lot lower than normal. Because large parts of the Chinese population cannot leave their homes, the oil processing industry is running at half capacity and passenger transport in the country is lagging behind.
Until now, China has stuck to their strict lockdown policies, but in October there were rumors that China would water down their dubbed zero covid policy. These rumors were rudely debunked on Thursday, November 10. During the five-yearly party congress of the Communist Party, the Chinese government announced that the existing covid measures would be tightened. According to President Xi Jinping, this is the only way to return to normal life quickly.
So far, the strict lockdowns have proved ineffective. The number of Covid infections is at its highest point since April and the virus is now spreading across the country. This makes it likely that oil demand from China will not increase, but rather decrease. In all likelihood, the megacity of Guangzhou is the next victim of a large-scale lockdown. To prevent this lockdown, the city council has started a large-scale test program. The residents of various neighborhoods have been obliged to be tested daily for three days. If this measure does not manage to reduce the number of infections quickly and substantially, this city also threatens to be completely locked. Inevitably, such a lockdown will further reduce Chinese oil demand.
Diesel price continues to fall
It is not only the price of crude oil that is falling. Diesel also became cheaper for the third week in a row. On Friday, November 4, 100 liters of diesel still cost €157,82. On Thursday, November 10, the price had fallen to €145,83. The low diesel price is the result of the drop in the price of heavy oil, the type of oil that is suitable for processing into diesel. As the world's largest producer of heavy oil, Russia is pulling the price down sharply. To sell enough oil, Russia has lowered their prices considerably. To compete with cheap Russian oil, several heavy oil producers lowered their prices.