(Bloomberg) -- Oil’s rally deflated with renewed hopes of an Iran nuclear deal while a resurgence of Covid lockdowns in China posed risks to demand.
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Futures in New York traded near $95 a barrel, dropping over $9 on Tuesday. Oil has shed more than 20% in a tumultuous past week of trading that’s seen wild price fluctuations and historic volatility.
In the latest developments, Russian Foreign Minister Sergei Lavrov said that sanctions on his country won’t affect the Iranian nuclear deal, sparking optimism that the agreement could be revived. A resurgence of Covid-19 cases in China, the world’s biggest crude importer, posed risks to to global demand.
“Risk premium seems to evaporate swiftly from oil prices,” said Norbert Ruecker, an analyst at Julius Baer. “The pandemic and health restrictions weigh on China’s economic outlook and thus oil demand.”
While there are still concerns that the disruption to Russian oil flows is squeezing an already tight market, OPEC has been quick to point out there is no shortage. In it’s monthly report, the cartel took an unusual step in acknowledging that the war threatens to intensify the surge in global inflation. U.K. Prime Minister Boris Johnson is expected to travel to the United Arab Emirates and Saudi Arabia this week in a push for more oil. The key cartel members have been resisting pressure from the U.S., Japan and European nations to accelerate production increases.
China’s latest virus outbreak, with growing clusters spawned by the highly infectious omicron variant in some of its most-developed cities and economic zones, is an unprecedented challenge for the country’s Covid Zero strategy. The nation injected more funds into the financial system and set a weaker-than-expected reference rate for the yuan, seeking to support the economy.
The market is also in the midst of a liquidity crunch, leaving prices vulnerable to big swings. Clearing houses have been increasing margins -- effectively making it more expensive to trade the same amount of oil -- and open interest has collapsed to the lowest since 2015. The gap between bids and offers for WTI was six cents at times on Tuesday -- it would usually only be about half that amount -- another sign of a less active market.
While buyers continue to shun Russian crude, there are signs that exports might not be completely cut off as some deals retreat from the public eye. Surgutneftegas PJSC is offering financing flexibility to some customers in order to keep crude flowing, while India is working out a mechanism to facilitate trade using local currencies. Still, the value of Russia’s Urals crude keeps moving lower.
Russia’s invasion of Ukraine has rippled through markets, fanning inflation as governments try to encourage growth after the pandemic. U.K. lawmakers were told by consultant Energy Aspects Ltd. that Britain may have to ration products like natural gas and diesel if the war continues. Consumers are already feeling the pain at the pump, with prices of transport fuels rising across the globe.
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