Oil drops on fears of inflation, China’s COVID flare up

With US inflation accelerating to a 40-year high and China imposing new curbs, investors questioned economic recovery.

Oil dropped more than $2 on Monday as a flare-up in COVID-19 cases in Beijing dented hopes of a pick-up in Chinese demand, while worries about more interest rate hikes to control rampant inflation have added further pressure.

West Texas Intermediate futures fell nearly 2 percent to trade below $119 a barrel amid a broader market selloff.

US inflation accelerated to a new 40-year high last month, raising the likelihood of more aggressive interest-rate hikes from the Federal Reserve.

China is starting to re-impose virus curbs as cases rise, just weeks after major easing in key cities such as Shanghai. Beijing’s most populous district Chaoyang announced three rounds of mass testing to quell a “ferocious” COVID-19 outbreak.

“The present price fall is exacerbated by warnings of a ‘ferocious’ spread of the COVID virus in Beijing by officials, casting doubt on immediate demand recovery,” said Tamas Varga of oil broker PVM.

US inflation and China's virus outbreaks weigh on prices

Oil has surged in 2022 as Russia’s invasion of Ukraine compounded supply concerns and as oil demand recovered from COVID lockdowns. Brent hit $139, the highest since 2008, in March, and both oil benchmarks rose more than 1 percent last week. The war has fanned inflation, driving up the cost of everything from food to fuel. US retail gasoline prices have repeatedly broken records and recently hit $5 a gallon.

Supply remains tight, with OPEC and its allies unable to deliver in full on pledged output increases because of a lack of capacity in many producers, sanctions on Russia, and output in Libya roughly halved by unrest.

“The supply/demand dynamics remain supportive of prices,” said Jeffery Halley of brokerage OANDA, who sees an extended oil sell-off as unlikely “unless US markets move to price in a full-blown recession.”

The US has repeatedly asked OPEC to pump more crude to help tame rising gasoline prices and the hottest inflation in decades.

Equities fell in Asia and made early losses in Europe as Friday’s data showing the US consumer price index rose 8.6 percent last month continued to weigh on financial markets.

The data put markets on alert that the Federal Reserve may tighten policy for too long and cause a sharp economic slowdown. The next Fed policy decision is on Wednesday.

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