The oil market is heating up, and it’s heating up fast.
West Texas Intermediate oil futures have lost over 20% since reaching their highest level since 2008 a week ago, falling below $100 a barrel on Tuesday. This came after a chaotic trading week in which prices fluctuated drastically, with intraday fluctuations for global benchmark Brent crude exceeding $20.
A rise of virus cases in China, the world’s largest crude importer, has spooked the market, as has what looks to be progress in cease-fire talks between Ukraine and Russia. While there are still concerns that the disruption of Russian oil exports is putting more pressure on an already tight market, OPEC and others have been eager to point out that there is no shortage.
The newest viral epidemic in China, which has created expanding clusters of the highly contagious omicron strain in some of the country’s most industrialized cities and economic zones, poses an unprecedented challenge to the country’s Covid Zero plan. To boost the economy, the country poured extra funds into the banking sector and set a weaker-than-expected reference rate for the yuan.
“Headlines continue to dominate sentiment in commodity markets,” said Daniel Hynes, a strategist at Australia & New Zealand Banking Group Ltd. “Oil prices should be under increased pressure as a result of this.” It doesn’t, however, represent the bigger reality, which is that Russian oil is becoming increasingly isolated.”
While Russian crude continues to be shunned by importers, there are indicators that exports may not be fully halted. Surgutneftegas PJSC is providing some customers with finance flexibility in order to keep oil flowing, while India is developing a mechanism to ease transaction in local currency.
Before discussions were suspended so each side could take stock, Ukraine’s chief negotiator stated they were working on a potential cease-fire with Russia. In their first high-level meeting on the conflict, the US and China also had a “serious discussion.” Meanwhile, the Federal Reserve is poised to begin tightening monetary policy this week, putting pressure on markets.
As governments try to stimulate growth following the pandemic, the invasion has sent shockwaves through markets, increasing inflation. Energy Aspects Ltd. informed UK legislators that if the conflict in Europe continues, the country may have to ration products like natural gas and diesel. Consumers are already feeling the pinch at the pump, as transportation fuel prices are rising around the world.