Oil falls again, China in focus

Oil prices continued to decline on Wednesday as concerns over China's health situation intensified while the world's second largest economy is in the grip of a major covid.
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Around 10:30 GMT (11:30 in Paris), the barrel of Brent North Sea for delivery in March, lost 2.25% to 80.25 dollars.
Its U.S. equivalent, a barrel of West Texas Intermediate (WTI) for February delivery, was down 2.09% to $75.32. The two global crude oil benchmarks have thus started the year with losses of around 6%.

The drop in prices is largely attributed by analysts to fears for black gold consumption in China, as the country is currently facing its worst outbreak of coronavirus cases since the pandemic began. Especially since “despite the relaxation of its zero Covid policy, the Chinese economy is weakening,” notes Stephen Brennock, analyst at PVM Energy.

Manufacturing activity in China declined in December for the fifth consecutive month, according to an independent index released Tuesday, as factories were disrupted by contamination outbreaks. The analyst believes that “economic activity and oil demand in the world’s largest crude importer will continue to weaken as it learns to live with the virus.”

In early December, Beijing put an end to its draconian “zero Covid” policy, which imposed widespread screening tests, strict monitoring of travel, and mandatory confinement and quarantine as soon as cases were discovered.

These measures, which have largely isolated China from the rest of the world, have dealt a severe blow to the world’s second largest economy. But the abrupt lifting of the sanitary restrictions has led to a resurgence of infections, which is also disrupting the economic life of the country. At the same time, “fears of a slowing global economy and a strengthening U.S. dollar” are adding to oil’s downward trend, say analysts at Energi Danmark.

Investors are awaiting the release of the U.S. Federal Reserve’s minutes on Wednesday to look for clues on the institution’s monetary policy. Since oil is traded in dollars, a strong greenback reduces the purchasing power of investors using other currencies, and thus weighs on demand.

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