Crude Oil Prices Capped by China Lockdowns, Underpinned by New Russian Sanctions

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures were down on Tuesday as demand worries stemming from China’s prolonged COVID-19 lockdowns outweighed the prospect of a European embargo on Russian crude.

On Tuesday, June WTI crude oil futures settled at $102.41, down $3.08 or -2.92%. July Brent crude oil finished at $104.97, down $2.61 or -2.49% and the United States Oil Fund ETF (USO) closed at $76.67, down $1.71 or -2.18%.

Beijing Tightens COVID Curbs

Beijing is desperate to prevent an outbreak of the Coronavirus, which is now numbering in the dozens of news cases a day, from spiraling into a crisis like the one in Shanghai.

It is not clear if Shanghai is turning a corner in its campaign against the virus. The number of new cases outside areas under the strictest precautions was up to 73 on Monday from 58 the day before – a setback after two consecutive days of no cases.

Beijing is mass-testing residents to avert a lockdown similar to Shanghai’s over the past month. The capital’s restaurants were closed for dining in while some apartment blocks were sealed out.

“There are real concerns about whether Chinese demand, which is a huge factor in global demand, will remain strong in 2022,” said Gary Cunningham, director at Tradition Energy.

EU Planning to Announce New Sanctions against Russia on Wednesday

The European Union will slap new sanctions on Russia for waging war against Ukraine, targeting Moscow’s oil industry, more Russian banks and those responsible for disinformation, the EU’s top diplomat said on Tuesday.

“We are working on the sixth package of sanctions which aims to de-SWIFT more banks, list disinformation actors and tackle oil imports,” Josep Borrell, head of the foreign policy unit at the EU’s executive European Commission, said in a tweet.

Officials said European Commission President Ursula von der Leyen is expected to spell out the proposed new sanctions on Wednesday, and that they would include a ban on imports of Russian oil by the end of this year, according to Reuters.

Short-Term Outlook

U.S. West Texas Intermediate and international-benchmark Brent crude oil are expected to continue to chop around inside a wide trading range over the near-term with volatility fueled by traders reacting to each headline dealing with supply and demand.

Bullish traders are hoping the European Commission’s announcement of new sanction on Russia will provide the spark that could trigger an upside breakout. But the market seems to have gotten used to the sanction news, which may fuel a mute reaction. It’s probably going to take a total embargo of Russian oil to spike prices higher. Right now, the news is just enough to underpin the market.

Bearish traders don’t want to see an end to China’s lockdowns. They want the global economy to weaken enough to substantially drive down demand for crude oil.

Over the weekend, China reported a drop in manufacturing PMI. Earlier this week, the U.S. reported a disappointing manufacturing PMI number. Both indicate the global economy could be slowing.

If China continues to weaken then this could start to affect the U.S. economy in a big way in about July. This would keep a lid on oil prices.