Oil prices drop as China lockdowns prompt demand worries

Oil prices dropped on Monday as optimism about peace talks between Ukraine and Russia eased concerns about supply levels while new coronavirus lockdowns in China raised the prospect of falling energy demand.

Brent crude, the global benchmark, settled 6.8 per cent lower at $112.48 a barrel, while US marker West Texas Intermediate dropped 7 per cent to $105.96.

Oil markets have swung violently over the past week, with intraday moves of at least 5 per cent each day as traders grappled with the latest developments from Russia and China, as well as Saudi Arabia where an oil storage facility was bombed on Friday.

On Monday authorities announced extreme lockdown measures in Shanghai, China’s leading financial centre. China is the world’s largest oil importer, and Warren Patterson, analyst at ING, said “this action yet again highlights that China is not willing to drop its zero-Covid policy and so continues to be a downside risk for the market.”

Volodymyr Zelensky, Ukrainian president, also said Kyiv was ready to discuss Russian demands such as pledging to remain neutral and abandon its drive to join Nato if Russia withdrew its troops, raising hopes of an end to the conflict which has driven up energy and commodity prices.

The fall in oil prices helped ease ructions in US Treasuries, which had sold off earlier in the session as traders placed bets on the Federal Reserve raising interest rates aggressively to tackle high inflation.

High energy costs have been a key component of elevated global inflation, which saps demand for fixed-income securities such as Treasuries by lowering the value of their interest. Brent remains about 15 per cent above its closing level on February 23, the eve of Russia’s invasion of Ukraine.

The yield on the two-year Treasury note, which moves inversely to its price, rose as much as 0.11 percentage points early in the day, before giving up most of the gains to trade 0.04 percentage points higher, at 2.34 per cent. The 10-year Treasury yield fell 0.04 percentage points to 2.45 per cent, having exceeded 2.5 per cent in earlier trading.

Despite the choppy trading in Treasuries, the US dollar stood firm against other major currencies on Monday, reflecting continued bets of tighter monetary policy.

“The market is pricing a significant overshoot in inflation and central banks being forced to react strongly, triggering an economic slowdown,” said Luca Paolini, chief strategist at Pictet Asset Management.

The five-year Treasury yield on Monday rose above the 30-year yield for the first time since 2006, before falling back to a fraction below the longer-dated security.

A so-called yield-curve inversion of this nature reflects concerns that the Fed’s attempt to battle inflation could over time depress growth or even cause a recession.

The dollar rose 1.5 per cent against the Japanese yen to purchase ¥123.88, the most since 2015 as the Bank of Japan took steps to maintain loose monetary policy while the Fed raises interest rates. Sterling dropped 0.8 per cent against the dollar to $1.31.

In equities, Wall Street’s S&P 500 share index climbed for a third consecutive session, rising 0.7 per cent while the tech-dominated Nasdaq Composite climbed 1.3 per cent. Electric carmaker Tesla was the biggest driver of the gains, jumping more than 7 per cent after it said it was considering a stock split.

Europe’s Stoxx 600 share index added 0.3 per cent. Asian bourses were mixed, with Japan’s Topix closing 0.4 per cent lower and Hong Kong’s Hang Seng adding 1.3 per cent.