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Oil Price Slips as Covid Cases Rise in China
12.07.2022

The price of Crude Oil is down again today, after witnessing mainly bearish price movements the day before. Over the past few days, the main price influences on Oil have been higher risk of recession, potential monetary policy alterations, as well as fear of further restrictions in China.

The price movement towards the end of last week was generally positive and increased in total by 7.12% within 2 days. However, when looking at the weekly or monthly performance, the price movement remains generally negative. Over the past 7 days, the price has declined by 12.50% before retracing back upwards by 57% compared to the previous bearish swing.

The price has been in a downward trend since early June, with the bearish impulse waves remaining much larger than the bullish movement. The bullish price movement last Thursday and Friday has only formed a pullback so far and has not yet seen a significant higher high.

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One of the main elements influencing the price is the latest Chinese COVID-19 discovery in Shanghai. It has been confirmed that the case was one of the newest variants which is known to spread extremely fast. The Chinese government also assured that the patient showed no serious symptoms. However, the Chinese government has opted for a zero COVID-19 policy in the past, meaning extreme lockdowns, testings, quarantines etc. As China is by far the largest importer of Oil, investors fear that further lockdowns will result in significantly lower demand.

In addition to the above concerns, economists and investors are also fearful of talks amongst certain politicians regarding limiting prices for Russian oil and retaliatory measures. Russia has already stated that further sanctions against the Russian energy sector would have "catastrophic" consequences for the global energy market and economy as a whole. Russia has repeated on many occasions that it will not trade oil at a loss under any circumstances. The US has been negotiating mainly with Asian countries to limit the price of Russian oil to $40-60 per barrel. If Russia stops supplying oil, it can significantly worsen the current oil supply crisis.

The market is also pricing a potential recession into the commodity and stock market. When looking at commodity prices in general we can see that steel, copper and palladium are down. There are beliefs that the more restrictive the monetary policy is, the lower the consumer confidence and lack of economic growth. These factors are likely to cause a recession towards the end of the year. A recession that would normally, without doubt, lower the demand for oil.

So we can see from the above, that there are indeed many elements pushing the price of oil down and potentially pushing market prices further down. However, traders should also note that the supply of oil is still very fragile, and can once again tip the scale in the opposite direction.

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