“China is the big fear factor right now,” said Michael Tran, managing director of global energy strategy at RBC Capital Markets.
Yet Monday’s selloff shows markets remain sensitive to shifts in energy demand, especially in China, the largest oil importer on the planet. Not only does China consume massive amounts of gasoline, jet fuel and diesel, but it’s also the largest source of energy demand growth in the world.
“To have this market firing on all cylinders, you need China. China is the biggest cylinder,” said Tran.
Shanghai, a city of about 25 million and a major hub of the Chinese economy, is set to have roughly half of its population banned from going out for four days starting Monday. The lockdown will then move to the other half of Shanghai.
“The magnitude of the selloff reflects fears that Covid lockdowns in China could spread,” Andy Lipow, president of Lipow Oil Associates, wrote in a report Monday.
Despite the losses, oil prices remain elevated as the war in Ukraine continues and the West imposes tough sanctions on Russia.
US crude dropped to $104.92 a barrel in recent trading. That leaves it up about 40% so far this year, including a gain of nearly 9% last week alone. Meanwhile Brent crude, the world benchmark to $112.11 a barrel Monday morning.