The rise in COVID-19 infections in China and global recession fears weigh on oil prices

January 10, 2023

2 mins read

The Brent crude oil ICE EU price declined by 8.25% week-on-week (w-o-w) to USD 78.75/barrel as China battles a new wave of COVID-19 infections. In December, China, the world’s largest importer of crude oil, announced an end to its zero-COVID policy. Although this reopening was thought to be bullish for oil prices, assuming an increase in demand, surging infections are now weighing heavily on the oil price.

The recent COVID-19 resurgence in China has caused global concern about the potential for further lockdowns, which could lead to a collapse in oil demand. Countries such as the US and India now require negative COVID tests from travellers entering from China. These measures all come ahead of the Chinese New Year, which historically leads to increased travel and, thus, higher demand for crude oil. However, the high rate of infections in China may result in less movement within the country and potentially Asia more broadly. Depending on the scale of the COVID outbreak, demand for oil could continue to be negatively impacted for some months, which would be a bearish oil price driver.

The prospect of a global recession is also weighing on oil demand. Throughout 2022, many central banks, including the US Federal Reserve and the Bank of England, raised interest rates to combat rampant inflation. There is a historical correlation between recession and plummeting oil demand, given the prospect of a slowing economy.

Despite demand concerns, the Organization of Petroleum Exporting Countries (OPEC) has continued with its two million barrel per day production cut target. This decision, made at the beginning of October 2022, initially acted as a bullish driver for oil prices given the prospect of lower supply in the market. Member states have signalled that they will maintain this supply cut over the coming months.

Mintec Team
Mintec Team

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