Oil Prices Fall From China Worries, Support Comes From European Embargo

Workers in protective suits keep watch on a street during a lockdown amid the COVID-19 pandemic, in Shanghai, on April 16, 2022. Aly Song/Reuters

Crude oil prices declined on Tuesday trading due to demand worries from China and the country’s weak manufacturing activity data even though prices are getting support from a possible European Union ban on Russian oil.

Brent crude oil July futures were trading at $106.10 per barrel on May 3 as of 09:57 UTC after hitting a high of around $108.30 in the day. The current downward pressure on oil prices came due to concerns about China’s COVID-19 situation. Several dozen Chinese cities continue to remain under partial or full lockdown due to COVID-19 cases and a strict zero-COVID policy by the Chinese regime.

With hundreds of millions of people being stuck in their homes, public consumption is getting negatively affected, forcing experts to scale down China’s growth forecasts.

China is the biggest consumer of crude oil and any sign of weakening demand will negatively affect prices. The country’s capital Beijing is mass-testing citizens to avoid a lockdown similar to the one imposed in Shanghai during the past month.

The National Bureau of Statistics (NBS) released the country’s April Purchasing Managers Index (PMI) data on Saturday which turned out to be disappointing. China’s April PMI fell to 47.7 in April from 49.5 in March, which is the second straight month of contraction.

This is also the lowest level since February 2020. PMI is a measure of the ongoing direction of economic trends in the manufacturing sector.

According to NBS, the COVID-19 disruption played a critical role in the decline of supply and demand in the manufacturing sector. “Some companies face difficulties in key raw material and component supplies, finished products sales, and rising inventories,” the NBS said, according to Reuters.

A survey of Chinese private businesses by media group Caixin showed that factory activity contracted at its steepest pace in 26 months. The export orders index slumped to its lowest level since June 2020.

Meanwhile, the European Commission is reportedly preparing a sixth package of sanctions against Russia for its invasion of Ukraine. This is lending support to oil prices. Expected to be proposed this week, the sanctions might potentially include an embargo on the purchase of Russian oil. Moscow accounts for 26 percent of the E.U.’s oil imports.

The move to restrict Russian oil imports comes a week after the Kremlin cut off gas supplies to Poland and Bulgaria as the two nations refused to pay in Russian roubles.

“Paying roubles through the conversion mechanism managed by the Russian public authorities and a second dedicated account in Gazprombank is a violation of the sanctions and cannot be accepted,” E.U. energy commissioner Kadri Simson said during a news conference after a meeting of E.U. ministers on Monday, according to Reuters.

The European Commission might spare Slovakia and Hungary from the proposed Russian oil embargo as the nations are heavily reliant on Moscow’s fossil fuels. According to the International Energy Agency, Slovakia received 96 percent of its crude oil and oil products imports from Russia last year. For Hungary, the number was 58 percent.

Germany, the biggest purchaser of Russian oil in the Union has indicated that it might manage a Russian oil embargo. In 2021, Germany imported 35 percent of its crude oil from Moscow, a number that has fallen to 12 percent in recent weeks.