Oil selloff intensifies on Covid fears and risk of US-China intervention

On Nov 19, 2021

US crude tumbled to a fresh seven-week low on Friday, settling at $76.10 a barrel. The slide is good news for American drivers hurt by the seven-year high in gasoline prices — a crunch that has soured consumers’ views on the US economy.

“We will definitely see some pricing relief on gasoline at the pump,” Tom Kloza, president of the Oil Price Information Service, told CNN on Friday, adding that the relief will be “feather-like as opposed to plunges.”

After a relentless rise, the national average gas price has finally leveled off at $3.41 a gallon, according to AAA. That’s roughly flat from a week ago.

“It looks for now as though the 2021 peaks have been established,” Kloza said.

Lockdown jitters

Unfortunately, one of the catalysts for Friday’s tumble in the market is another ominous development on the Covid front: Austria announced plans Friday to impose a national lockdown, the first in Europe this fall, in a bid to reverse a spike in Covid-19 cases.

The lockdown is raising fears in the oil market of tough new health restrictions elsewhere that will slow the economic comeback and eat into energy demand.

“The demand signals today are overwhelmingly bearish,” Louise Dickson, senior oil markets analyst at Rystad Energy, wrote in a note on Friday. “The risk is real in Europe, especially if Austria’s move to lockdown has a domino effect across the continent. If Germany follows suit, sub-$80 price levels may be here to stay.”

Will China and America team up?

Beyond the lockdown fears, oil markets remain jittery over the specter of the United States and China teaming up to intervene in the previously red-hot energy markets.

Since crashing to negative-$40 a barrel in April 2020, US crude has climbed as much as $125 a barrel because supply simply hasn’t kept up with demand. OPEC and its allies, known as OPEC+, have only gradually increased production. US oil companies haven’t been in a rush to add supply either.

A coordinated release from two of the world’s biggest energy consumers would have a bigger impact than if the Biden administration acted alone to tap the Strategic Petroleum Reserve.

Officials in China put out a statement on Friday suggesting that a release of barrels from the country’s emergency reserve is on the table.

Americans say they hate the economy but act like they love it

“The bureau is pushing forward with crude oil release-related work at the moment,” authorities that oversee China’s strategic oil reserves said in a statement to CNN.

According to a readout published by the White House, US President Joe Biden and Chinese President Xi Jinping discussed during their virtual summit this week the “importance of taking measures to address global energy supplies.”

A coordinated release by the United States and China could also be used as a bargaining tool to get OPEC+ to open up the taps, after months of refusing to do so.

“There is firepower with a concerted effort,” said Robert Yawger, director of energy futures at Mizuho Securities.

‘Short-term fix’

Still, this is not a long-term solution, as releasing barrels from emergency reserves doesn’t solve the underlying supply-demand mismatch. And these emergency reserves hold a finite amount of oil — crude that is typically reserved for supply shocks, not…

Oil selloff intensifies on Covid fears and risk of US-China intervention

Lockdown jitters

Will China and America team up?

‘Short-term fix’

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