Oil Falls 30% From Peak as Gulf Supply Hopes and China Lockdowns Ease Pressure

Just over a week before this Tuesday, Brent crude, the global oil benchmark, had jumped above $139 a barrel. Analysts were warning it could reach $185, then $200, as traders shunned Russian oil after the invasion of Ukraine. That would have pushed inflation higher and put heavy strain on the global economy. Then the market turned. Brent futures have fallen almost 30% from that peak, and on Tuesday they shed another 6.5% to settle below $100 for the first time this month.

Stocks rallied on the news. The Dow gained about 600 points, or 1.8%. The S&P 500 rose 2.1% and the Nasdaq 2.9%.

Two hopes are behind the pullback. One is that Saudi Arabia and the United Arab Emirates could raise production. The UAE's ambassador to Washington said his country wants to pump more, which revived the idea that OPEC might step in after all. The other is that China may need less oil because of new Covid-19 restrictions: a lockdown in the tech hub of Shenzhen and new rules in Shanghai. China imports about 11 million barrels a day. Russia and Ukraine are also still talking, even as the war continues.

The spike had come when traders began treating Russian crude exports as untouchable. That raised the question of how to replace 4 to 5 million barrels a day, just as fuel demand climbs into summer. Bjørnar Tonhaugen, head of oil markets at Rystad Energy, said investors seem to have asked whether they went too far, too fast. "People remembered we are still in a pandemic," he said.

The drop has had a practical effect: US gasoline prices have stopped climbing for now, though a gallon still averages almost $4.32. If oil holds near $100, some fears of accelerating inflation could ease, and policymakers would likely feel a little relief. Still, oil trades well above its cost of production, and analysts expect wild swings to continue. Russian oil is selling at a $26 discount to Brent. Tonhaugen said he would not rule out $200 yet, calling it too soon, and described the moment as "the quiet before the storm." Giovanni Staunovo of UBS expects $125 by the end of June.

Chinese markets had a worse day. The Shanghai Composite fell almost 5% and Hong Kong's Hang Seng nearly 6%, leaving the Hang Seng down more than 10% over two sessions. This came despite strong data: retail sales rose 6.7% in the first two months of the year, and industrial production jumped 7.5%, well beyond forecasts. Investors are focused on the worst Covid outbreak in two years, a regulatory crackdown, and fear of secondary sanctions if Beijing backs Russia, as TD Securities strategist Mitul Kotecha noted. Julian Evans-Pritchard of Capital Economics said wholesale lockdowns could be more disruptive than last summer's Delta wave. Tencent reportedly faces a record fine over anti-money laundering rules, and Alibaba and others have been hit by the SEC's push on foreign companies that miss US disclosure requirements.

Russia, meanwhile, may be close to its first foreign debt default since 1918. Western sanctions froze roughly $315 billion, about half its foreign reserves, and its finance minister said creditors from unfriendly countries will be repaid in rubles. Rating agencies would likely call that a default. The test could come Wednesday, when $117 million in interest is due on dollar bonds, which JPMorgan says must be paid in dollars. A default could drive out the last foreign investors, and its wider effects are hard to gauge. Patrick Jenkins of the Financial Times wrote that the world should remember Lehman.

Next up are US Producer Price Index data at 8:30 a.m. ET, and tomorrow the Federal Reserve is expected to begin raising interest rates for the first time since the pandemic began in 2020.