Brent crude oil plunged 8.8 percent to $111.98 per barrel by 5pm yesterday, amid fuel demand concerns in China after Shanghai launched a phased lockdown to curb surging Omicron cases and suspended public transport.
South African markets traded in negative territory for the better part of yesterday before ending the day on a positive note, with the JSE All Share Index moderating to 74 280 points.
China yesterday locked down its biggest city of 26 million people, Shanghai, in a bid to conduct mass testing and control a growing outbreak after the country recorded more than 6 000 daily cases, the highest since the Covid-19 pandemic began.
China’s tightening of lockdown measures in Shanghai dampened risk appetite and saw the dollar trade firmer yesterday morning.
ActivTrades technical analyst Pierre Veyret said investors were uncertain of how long the lockdowns would last in China, and this had left sentiment towards oil stocks negative.
“Uncertainty is also growing in China as the nation faces a dangerous virus resurgence, which tends to weigh market sentiment down towards oil and energy linked shares,” Veyret said.
“The current short-term consolidation is at the centre of many investors’ minds at the moment as most of them wonder if this is just a pause before reaching new highs or just the beginning of another bearish leg,” he added.
Meanwhile, the EU Council summit last week failed to agree on additional sanctions against Russia amid opposition from Germany and others reliant on energy exports from the country, despite US President Joe Biden's pressure.
The moves followed a 10.5 percent jump in oil prices last week as markets grappled with supply disruptions caused by sanctions against Russian energy, damage to a major pipeline in the Black Sea and militant attacks on Saudi oil facilities.
The ongoing conflict between Russia and Ukraine has sparked fears of a global energy supply crisis affecting electricity and fuel security.
As the world’s third largest oil producer, uncertainty around oil supply from Russia has sent the oil price soaring.
However, Momentum Investments economist Sanisha Packirisamy said the Ukraine conflict was not the only reason for skyrocketing fuel prices.
“Before the war between Russia and Ukraine, the world economy was growing to the point where demand in many instances had outpaced supply,” Packirisamy said.
“Organisation of the Petroleum Exporting Countries Plus (OPEC+) did not manage to increase oil production to levels that could satisfy the increase in demand.”
Packirisamy said the ongoing conflict between Russia and Ukraine was largely to blame, however, there were a few pre-existing issues that aided the current fuel price panic.
These levels have already spiked above US$130 per barrel, almost as dire as in the 2008 recession.
Although the price per barrel had since receded, Packirisamy warned that the situation could quickly change.
“Uncertainty around the future supply of oil, with Russia being a large supplier to many countries, has contributed to knee-jerk reactions, which have driven the price of Brent oil to extremely high levels,” she said.
“If the war intensifies and expands, the price of oil can increase much more, but if a compromise can be reached, oil can decrease closer to levels observed at the start of the year.”
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