Brent falls on the threat of COVID in China
Fears of an economic recession that will reduce investment and spending are driving down the price of hydrocarbons. This Monday saw the biggest fall in the last two weeks since 11 April, when the oil price thermometer read 98 dollars per barrel of Brent. The morning of Monday 25th closed with a price of 102 dollars (-4.1%), with a low of 101, almost a -5% variation.
Behind the threat of economic recession are the restrictions on economic activity taking place in China after the new wave of COVID that is affecting the country's major cities. China's most populous city, Shanghai, also one of the world's largest ports, has been simmering under anti-covid restrictions since the end of March. The country is recording its worst COVID numbers since the start of the pandemic, with a record number of daily cases. The shutdown of the Chinese machinery is a major drag on global trade, giving a negative prognosis for economic growth across the globe.
These anti-covid measures have hit Chinese stock markets hard, with falls of between 4 and 6 per cent, further exacerbating the problem. The stock and Brent falls confirm market fears that the Chinese authorities will keep the restrictions in place for much longer. The fall in Brent gives the price curve a breather. Since the Russian invasion of Ukraine, oil prices have risen steadily until well into April, with the significant drop on the 11th.
On the United States side, the US Federal Reserve announced that it plans to raise lending rates by between 0.25% and 0.5%, according to statements by Jerome Powell, the Fed's chairman. It would be the first interest rate hike in the US since 2018. The Federal Reserve told the Wall Street Journal that by 2023 rates should reach 2.75%, the highest since 2008, a far cry from the data of the pre-pandemic months.
The administration of US president Joe Biden has asked OPEC+ on several occasions to increase production of Brent barrels following the Russian invasion of Ukraine. The oil producers' organisation has refused to change its roadmap and has repeated that it will maintain the same production levels, thus controlling prices. The European Union joined the US demand after increasing sanctions against Russia for its invasion of Ukraine. OPEC+ refused to "politicise" Russia's status within the organisation, choosing to dissociate itself from Putin's actions. "Russia is an important member, and regardless of politics, this volume (...) is required today, and unless someone is ready to come and bring ten million barrels, we don't see that one of them can replace Russia," said UAE Energy Minister Suhail al-Mazrouei in late March. The Fed's announcement has affected the barrel price downward at the same time as the recession in the Chinese economy, as it is a blocker for investment and growth.
On the European central banks' side, the outlook is similar. Bank forecasts suggest that interest rates in the euro zone will also trend upwards over the coming months. In a new report, Deutsche Bank points to such a rise in both interest rates and deposit rates. The European Central Bank must fight rising inflation, a consequence of the war in Ukraine.