What Do Traders Need to Watch This Week?

China

Stock bulls are hoping a “China reopening trade” might begin to develop as lockdowns in Shanghai and other cities are lifted this week. It will take a while for economic activity to ramp back up and quarantine zones are still in place for new cases, but economists are hopeful it is a major step toward finally improving global supply chain dislocations.

Unfortunately, the prospect of China manufacturing coming back online combined with a deal to cut Russian oil imports in the EU is sending oil prices skyrocketing again. Brent crude futures topped +$120 per barrel yesterday, the highest in two months. China’s oil consumption plunged by about -1.2 million barrels per day in May under the country’s extreme Covid lockdowns which experts say helped offset the loss of Russian supplies that buyers in the West have either banned or are trying to avoid.

China has actually boosted its Russian crude buying as those supplies are still available at a steep discount, which is also offsetting some of the demand for non-Russian supplies. China refiners aren’t all set up to process China’s Urals crude grade, though, which oil insiders say could limit how much more it buys from Russia. Meaning China will be turning back to the same supplies that the West may now need more of if the EU successfully implements a ban on Russian crude cargoes.

EU ban

EU officials this week are expected to finalize the ban that will also block EU insurers from covering vessels carrying Russian crude. The tricky part there is that EU companies are responsible for insuring 95% of the world’s oil trade, so that move could have implications far beyond the EU if it impacts ships carrying Russian oil anywhere in the world.

Russian oil that is supplied to the EU via pipeline will not be impacted by the new restrictions. There is some talk that OPEC may be preparing to increase production based on recent moves by the group to exempt Russia from production targets but it’s too soon to know if that will materialize.

Bottom line, the oil market’s supply-demand dynamics are again in flux and pressuring oil prices higher, which is obviously bad news for inflation as elevated energy costs ultimately lift prices for pretty much everything else.

Finally, the Fed’s Beige Book is due out today, and on the earnings front, today’s highlights include Chewy, GameStop, and Hewlett Packard.