China Covid-19 Lockdowns vibrant oil markets, adding to uncertainty

New Covid-19 shutdowns in China have dragged oil prices back below $100 a barrel, creating new uncertainty over a global economic expansion hampered by the war in Ukraine, rising inflation increase and the end of the stimulus measures.

Oil futures in New York fell 6.4% on Tuesday, extending last week’s decline to more than 22%. Last week, they surpassed $130 a barrel for the first time since the financial crisis, reflecting expectations that the war-related supply shock could linger. Trade has been unraveled by cease-fire negotiations, bargain-hunting Russian oil buyers in Asia and a reminder from China that the pandemic isn’t over yet.

Markets ranging from stocks and bonds to timber and wheat futures have been rattled by volatility this year as central banks begin to remove economies from the era support pandemic and Russia’s invasion of Ukraine threaten to deplete supplies of vital raw materials. Expectations that the Federal Reserve would raise interest rates on Wednesday for the first time in more than three years have dampened appetite for some of the riskier assets that have flown in the money-making environment of the pandemic.

Despite Tuesday’s gains, tech stocks halted years of underperformance that led to a 17% decline in the Nasdaq Composite this year. Chinese stocks have lost 7.4% this week on rising concerns related to the health of global supply chains and questions about growth in China. Energy stocks, in which investors have sought protection from the highest inflation in a generation, have lost some luster recently.

The S&P 500 added 2.1% on Tuesday, though energy shares fell 3.7%. The Dow Jones Industrial Average rose nearly 600 points, or 1.8%.

Unpredictability from all angles has clouded economic forecasts and made business decisions difficult for everyone from oil drillers and metalworkers to restaurateurs and homeowners. . At investor conferences and earnings calls, “uncertainty” has become a buzzword. Volkswagen AG

Chief Executive Officer Herbert Diess told investors on Tuesday that the fight has set the German carmaker’s optimistic outlook for 2022.

“It is getting worse, not better, both in terms of economic growth and inflation,” said Sung Won Sohn, a professor of finance and economics at Loyola Marymount University in Los Angeles. “Uncertainty is growing.”

Last week, oil prices were their highest in more than a decade, fueled by speculation and panic buying after US sanctions against Russia. The concern is that output from one of the world’s top petroleum exporters will dry up as soon as economies emerge from the pandemic and start burning more fuel. Higher oil prices appear to be the surest bet in the market, with stocks and bonds selling off.

On Tuesday, West Texas Intermediate lost $6.57 a barrel to $96.44, down more than 22% from a week earlier, when the main US oil price was steady at $123.70. Brent crude, which rose above $130 a barrel at the start of last week’s trading session, fell 6.5% on Tuesday and ended at $99.91.

Gasoline and diesel futures prices in New York also fell, reversing much of the gains since the Russian attack. Energy stocks, which form the only segment of the S&P 500 stock index that have risen this year and have recently acted as an inflation buffer, also took a hit on Tuesday. Exxon Mobil Corp.

shares fell 5.7% while refiner Valero Energy Corp.

sink 6.8%.

However, fuel prices are still high enough to ease household budgets already strained by the highest inflation in decades. Consumer energy costs in the US rose 25.6% in February from a year earlier, compared with a 7.9% increase in overall inflation, according to the Bureau of Labor Statistics.

Despite the drop below $100 a barrel, oil is still 49 percent more expensive than it was a year ago. Despite the slump in the futures market, the national average retail price for a gallon of unleaded gasoline hit a record $4.33 over the weekend and was only about a cent cheaper on Tuesday, according to AAA. .

Before Russia attacked Ukraine, analysts expected oil prices to hit $100 this summer during peak driving season. That forecast predicts a drop in drillers relative to demand, which is growing as economic restrictions are eased around the world. Russia’s aggression adds to concerns about fuel supplies.

The Organization of the Petroleum Exporting Countries has given up trying to forecast the impact of war on energy markets. The cartel on Tuesday declined to make any adjustments to its monthly market forecast, saying it could not accurately predict the far-reaching consequences of the conflict.

China’s new restrictions now make oil demand a problem, raising doubts about whether the world will move beyond Covid-19 towards stronger growth. In addition to the closure of Chinese drivers, factories in closed areas may find it difficult to produce enough goods, exacerbating shortages and driving up prices.

“It’s a new wrinkle in the story we’re facing,” said Bruce Kasman, chief economist at JPMorgan Chase. He predicts inflation will climb much higher in the coming months than previously thought, which will ultimately hamper households’ ability to spend widely, slowing economic growth. “Right now, I don’t want to think too much about where we’re going in six or nine months because there are so many moving parts,” he said.

The bank’s economists predict that the global economy will grow at a 2.5% annual rate in the first half of this year, down from their 4% growth forecast last month. They expect consumer prices to increase at an annual rate of 7% over that period instead of the previous estimate of 4%.

Bank of America last week predicted that global output will grow 3.6% this year, down from its previous estimate of 4.3%, but warned that the forecast could change again. due to rapidly changing conditions. “Forecasting the impact of a Russian invasion is like catching a falling knife,” the bank’s economists wrote in a note to clients.

Write letter for Ryan Dezember at ryan.dezember@wsj.com and Josh Mitchell at joshua.mitchell@wsj.com

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