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Crude oil prices may bounce back after initial China lockdown shock

WTI and Brent crude oil prices dropped more than 8% overnight on Shanghai lockdown; negotiation odds between Ukraine and Russia seen increasing amid military stalemate and prices likely to recover once China lockdowns end.

Source: Bloomberg

WTI and Brent crude oil prices fell more than 8% overnight after Shanghai, a key Chinese financial hub, began a two-stage lockdown on Monday due to surging Covid-19 cases. The city east of the Huangpu River makes up stage one while the area west of the river makes up stage two, expected to begin April 1. The move came as a surprise to markets, given that city officials were denying speculation of a widespread lockdown as late as Saturday. Beijing may have influenced that decision as China attempts to stick to its 'Zero Covid' policy.

Still, oil prices remain higher on the month, propped up by Western sanctions on Russia that have dented global supply. While much of Europe has foregone targeting Russian oil imports, the United States has banned them. That, along with the barring of key banks from the SWIFT global messaging system, has cut off a large share of Russian-sourced oil barrels from the world market. China is reportedly soaking up some of the displaced Russian output at a steep discount of around $20 to $30 per barrel, according to various sources.

While the lockdown in China hit prices, the downside may not last. Negotiations between Ukraine and Russia haven’t found much success, but the odds of a cease-fire have increased in recent weeks amid a military stalemate. However, Western sanctions will likely remain even with a cease-fire or wider agreement, at least for the near-term. A lot of business divestment is also likely permanent. That could force Russia to stop pumping oil at many of its wells in the coming months.

That would risk doing long-term damage to global energy markets, as taking wells offline has lasting damage to their ability to produce oil. Moreover, most of Russia’s oil fields are still using oil Soviet technology, further crippling the country’s ability to restore as much production as possible. If that were to occur, it could dent global supply for good, which could effectively put a long-term tailwind behind oil prices.

Nevertheless, the current pullback may not last once markets start to look past the current situation in China. It is also important to keep in mind that China remains committed to strict Covid containment measures. That leaves the door open for further lockdowns if the virus outbreak spreads to other major cities.

WTI crude oil technical outlook

WTI prices fell below the 110 psychological level but stopped short of the high-profile 100 mark. A small bounce in early Tuesday APAC trading saw prices lift a bit over 1%, but bulls may want to recapture the 110 level before hitting the buy button with confidence. The 20-day Simple Moving Average (SMA) just below that level may offer some resistance. Alternatively, a resumption to the downside would bring the 50-day SMA and trendline support from the December swing low into focus.

WTI crude oil daily chart

WTI CRUDE OIL DAILY CHART Source: TradingView

Follow Thomas Westwater on Twitter @FxWestwater

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