China's Covid clampdown offsets supply constraints to pull Brent lower

Front-month ICE Brent has decreased by $0.73/bbl on the day from Friday, to $95.26/bbl at 09.00 GMT. But Brent futures are on track to have gained more than 11% over the past month.

PHOTO: OPEC thinks oil demand will continue to grow for at least another decade, Reuters reports. Getty Images

Upward pressure:

Several top US oil producers expect to produce less oil from the Permian Basin than previously forecast. This could mean a slowdown in volumes from the US' largest shale oil field. According to Chevron, Permian production will be at the lower end of its 700,00-750,000 b/d guidance, while ExxonMobil expects its Permian output to grow by 20% instead of 25% as guided earlier.

The global gasoline market is strained, according to Chevron chief executive Mike Wirth, adding that he has not seen "anything like the current market in terms of overall tightness." Daren Woods, chief executive of ExxonMobil, has described the energy market as constrained generally.

Oil output from shale basins may peak by 2024, according to Amrita Sen Energy Aspects, adding that they "Don't expect US shale producers to ride to the rescue."

These warnings have coincided with fears of fuel shortages happening during the upcoming winter, which were exacerbated by Energy Information Administration (EIA) data last week that showed US crude exports peak.

According to the chief executive of Spanish oil and gas company Repsol, parts of Europe are running out of middle distillates, which could lead to high diesel and gasoil prices.

Sources tell Reuters that OPEC is likely to maintain its forecast that there will be global oil demand growth for at least another decade, when it releases its World Oil Outlook report today.

Downward pressure:

Chinese demand weakness is expected to cap oil gains. Several major Chinese cities, including Beijing and Shanghai, have imposed partial lockdowns under the government's zero-Covid policy after Coronavirus cases hit an 80-day high.

China's factory and service sector output has declined in October, indicating a slowdown in demand due to Covid restrictions. China's National Bureau of Statistics reported that the official manufacturing purchasing managers' index (PMI) fell to 49.2 in October, from 50.1 in September.

Stephen Innes, managing partner of SPI Asset Management says, “the purchasing managers' index (PMI) data contracting adds to the post-China congress party blues for oil markets. It is not difficult to draw a straight line from weaker PMIs to China's COVID-zero policy. So long as COVID-zero remains entrenched, it will continue to thwart oil bulls.”

By Konica Bhatt

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