As China COVID cases rise, oil falls more than 5%; global economy worries

World oil prices took a slump as China braces for higher cases of Covid-19 forcing lower crude oil demand.  

According to Refinitiv Eikon data; Brent futures settled at $77.84 a barrel, falling $4.26, or 5.2%. U.S. crude settled at $72.84 a barrel, shedding $4.09, or 5.3%. Brent has reportedly fallen by about 9.4% this week, its steepest two-day loss at the start of the year since January 1991,

Bob Yawger, Director of energy futures at Mizuho in New York said that “Crude oil is trading lower on concerns around China COVID-19 and the Fed forcing a global recession… both demand destruction events,”

World Health Organization officials said data from China showed that while no new coronavirus variant has been found there, the country has under-represented how many people have died in its recent, rapidly spreading outbreak.

The state of the global economy and central bank rate hikes also weighed on crude prices.

In December, U.S. manufacturing contracted a further drop for a second straight month to 48.4 from 49.0 in November, in the weakest reading since May 2020, the Institute for Supply Management (ISM) said.

At the same time, a U.S. Labor Department survey revealed that job openings fell less than expected which raised concerns that the Federal Reserve would use the tight labor market as a reason to keep rates higher for longer.

The Chinese government reportedly increased its export quotas for refined oil products in the first batch for 2023, signaling expectations of poor domestic demand.

Top oil exporter Saudi Arabia could cut prices for its flagship Arab Light crude grade to Asia in February, having been set at a 10-month low for this month, as concern about oversupply continued to cloud the market.

A Reuters survey on Wednesday found that despite an agreement by the wider OPEC+ alliance to cut production targets to support the market, still OPEC oil output rose in December.

The survey also found that last month, the Organization of the Petroleum Exporting Countries (OPEC) pumped 29 million barrels per day (bpd) , up 120,000 bpd compared from the month of November.

Meanwhile, a revised Reuters poll showed that the U.S. crude oil stockpiles are likely to have risen by 1.2 million barrels last week, with distillate inventories expected to have fallen.

In addition, the U.S. crude oil inventories likely rose by 3.3 million barrels last week along with gasoline stocks jumping 1.2 million barrels, while distillate stocks fell, according to market sources citing American Petroleum Institute figures.