Crude Oil Lower; Supply Disruptions Start to Ease

Crude Oil Lower; Supply Disruptions Start to Ease

Oil prices weakened Monday as supply problems dissipated and concerns about the rapid rise of Omicron cases in China, the second largest economy in the world, came to the fore.

By 9 AM ET (1400 GMT), U.S. crude futures traded 0.2% lower at $78.75 a barrel and the Brent contract fell 0.2% to $81.55.

U.S. Gasoline RBOB Futures were down 0.1% at $2.2980 a gallon.

The Chinese port city of Tianjin announced plans Monday to test its 14 million residents within the next 48 hours after the discovery of a cluster of Covid cases, including two of the highly transmissible Omicron variant.

“While we see other countries adapting to live with Covid, China clearly continues to pursue its zero-covid policy, “ said analysts at ING, in a note. “This is a risk to oil demand since China is the largest crude oil importer in the world. We are also approaching Chinese New Year, a time when there is normally plenty of domestic travel, and so any domestic restrictions will weigh on oil consumption.”

Still, while this potential hit to demand is important, the market is still mostly focusing on supply dynamics.

Kazakhstan’s largest oil venture Tengizchevroil is gradually increasing production at its important Tengiz field, operator Chevron said on Sunday, after violent protests in recent days over the high price of fuel resulted in disruptions to production levels.

Similarly, Libya’s oil production received a major boost with the completion of maintenance works on a major crude pipeline over the weekend, though shutdowns elsewhere are still curtailing output.

The major issue, however, is the apparent inability of OPEC and its allies to increase production as promised over the coming weeks. Global inventories are still below historic averages, despite the growth in the number of Omicron cases causing the cancellation of thousands of flights.

“There are only a handful of members that have the capacity to increase output, whilst others are failing to meet their agreed production levels due to disruptions and lack of investment,” added ING.

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