Crude Oil Prices May Recover After The First China Shock

WTI and Brent crude oil prices plunged more than 8% overnight after Shanghai, a major financial center in China, implemented a two-stage shutdown on Monday in response to an increase in Covid-19 cases. Stage one encompasses the territory east of the Huangpu River, while stage two encompasses the area west of the river, which is slated to begin on April 1. Markets were taken aback by the action, considering that local authorities had denied rumors of a general lockdown as recently as Saturday. Beijing's desire to adhere to its 'Zero Covid' policy may have affected that choice.

Nonetheless, oil prices remain up on a month-over-month basis, bolstered by Western sanctions on Russia that have harmed global supply. While most of Europe has refrained from targeting Russian oil shipments, the US has done so. This, along with the exclusion of important institutions from the SWIFT global messaging system, has effectively eliminated a substantial portion of Russian oil barrels from the global market. According to several reports, China is absorbing part of the displaced Russian supply at a severe discount of roughly $20 to $30 per barrel.

While China's trade embargo has depressed prices, the decline may not be permanent. While negotiations between Ukraine and Russia have been mostly unsuccessful, the likelihood of a cease-fire has grown in recent weeks amid a military stalemate. Western sanctions, on the other hand, are likely to stay in place even if a cease-fire or broader deal is reached, at least in the short term. Many corporate divestitures are also likely to be permanent. This might compel Russia to temporarily halt oil production at a number of its wells in the coming months.

This would risk causing long-term harm to global energy markets, since shutting down wells permanently impairs their capacity to produce oil. Additionally, the majority of Russia's oil fields continue to use Soviet-era equipment, impeding the country's capacity to recover as much output as feasible. If that occurs, it has the potential to permanently reduce world supply, essentially creating a long-term tailwind for oil prices.

Nonetheless, the recent slump may not stay long as markets begin to look beyond China's present crisis. Additionally, it is critical to remember that China is still committed to tight Covid containment measures. This leaves the possibility of more lockdowns open in the event that the viral epidemic spreads to other large cities.

Technical prognosis for WTI crude oil

WTI prices dipped below the psychologically significant 110 level but fell short of the high-profile 100 barrier. Prices rose little more than 1% in early Tuesday APAC trade, although bulls may want to reclaim the 110 mark before confidently buying. Just below that level, the 20-day Simple Moving Average (SMA) may provide some resistance. Alternatively, a continuation to the downside would bring into focus the December swing low's 50-day SMA and trendline support.

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