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Oil prices dip as Shanghai enters phased COVID lockdown

Oil prices fell as China locks down key parts of its financial and manufacturing hub to ramp up mass testing. Photo: Hector Retamal / AFP via Getty Images
Oil prices fell as China locked down key parts of its financial and manufacturing hub to ramp up mass testing. Photo: Hector Retamal/AFP via Getty

Oil prices fell on Monday after China, the world’s biggest crude importer, announced a further tightening of restrictions in Shanghai amid surging Omicron cases.

Shanghai, a key financial and manufacturing hub and home to over 26 million people, will enter a staggered lockdown, to conduct mass COVID testing to try and stem an outbreak.

The city’s eastern side, which includes its financial district, is to be locked down from Monday to Friday. The western half is scheduled to go into a similar lockdown from 1 April.

Shanghai's public transport has also been suspended and firms and factories have been ordered to halt operations or work remotely.

Brent crude (BZ=F) dipped 6.6% to $112.68 (£86.16) a barrel. US light crude (CL=F) was 7% lower to $105.96 in electronic trading on the New York Mercantile Exchange at the time of writing.

Key benchmark, brent, slipped 6.6% to $112.72 a barrel in afternoon trade in London on Monday. Chart: Yahoo Finance UK
Key benchmark, brent, slipped 6.6% to $112.72 a barrel in afternoon trade in London on Monday. Chart: Yahoo Finance UK

However, despite the decline, crude remains nearly 80% higher than it was a year ago after the Ukraine conflict helped to drive up prices.

"It almost feels like we’ve stepped back in time two years as lockdowns in China once again rock the markets,” said Russ Mould, AJ Bell investment director.

"The two-day restrictions imposed in Shanghai are evidence that the pandemic is not yet over and inevitably, given the implications for global growth, have put oil prices under pressure."

Houthi rebels in Yemen also announced a temporary pause in hostilities against Saudi Arabia after an attack last week targeting various Saudi Aramco (2222.SR) oil and gas sites caused a temporary drop in output.

Read more: European markets push higher ahead of Ukraine-Russia peace talks

Earlier this month the International Energy Agency (IEA) warned that global markets could be denied 2.5 million barrels a day of Russian oil from April as sanctions take hold and buyers shun Russian supplies.

The Paris-based agency also cut its demand forecast for the second to fourth quarters of this year by 1.3 million barrels per day (bpd).

IEA said a move by its members to release 60 million barrels from emergency supplies would initially provide a buffer for energy markets but these could not address long-term supply issues.

Meanwhile, the Organisation of the Petroleum Exporting Countries and Allies (OPEC+) said it was sticking to a 2021 agreement to continue gradual restoration of output that was halted during the pandemic. The cartel will add 400,000 bpd to the market from April.

Only two cartel members, Saudi Arabia and the United Arab Emirates, have the spare capacity to offset the potential market shortfall. The UAE previously encouraged its OPEC+ members to pump more oil to calm high prices and relieve fuel costs.

Watch: Why are gas prices rising?