Shanghai Lockdown Spooks Energy Markets
March 29, 2022
Energy prices were off about 7% yesterday in a huge sell-off across the board. The main drivers were China locking down Shanghai to stop the spread of a COVID outbreak. Shanghai has a population of 26 million people, and the shutdown is estimated to potentially lower oil consumption by 800,000 BPD. Also, the news of Russia and Ukraine holding peace talks again has added hope that something positive might come of these talks and end the fighting which is great news and bearish prices. The other news was the potential for a release of oil from the strategic reserves.
Energy prices are trading lower again today and a large part of the risk premium is being taken out of the market. There is still room for this market to move lower and get back to the lows of March 15. Despite all the bearish news the markets are looking for a level of support and could settle into a range, as there are still a lot of issues for these markets like low inventories. But the Russia and Ukraine wars have been front and center and if that can get resolved the market will begin to try and find the appropriate price levels for the next concerns moving forward.
On Friday of last week, the University of Michigan’s consumer sentiments survey came out at 59.4 versus an expectation of 59.7. This 59.4 is the lowest level since 2009.
Several sources close to OPEC+ said the group will likely stick to its plan for a modest increase in its oil output in May. They have been doing 400,000 BPD monthly increases but a requested update to the original benchmark production level from the UAE might make the May increase something more like 432,000 bpd.
UAE Energy Minister, Suhail al-Mazrouei, said oil producers who felt like outcasts at the COP 26 climate conference last year are now being treated like superheroes because their supplies are in strong demand. He said Russian oil is needed by energy markets and no producers can substitute its production. He suggested it was not possible to underinvest and preach renewables and then ask for an output increase during a crunch, adding that long-term planning is needed. He stressed the need for investment in oil and gas alongside renewables even though the energy transition is taking place, saying OPEC+ needs to replace at least 5-8 million barrels lost every year to keep production where it is.
A story that hit the wires this morning that Russia thought the peace talks were now entering into a practical stage sent crude oil lower in a quick sell-off. Along with this news were reports of Russian troops pulling back in from some of the areas around Kyiv. None of this is substantiated so today could see big trading ranges and extreme volatility.