WTI falls back under $120, set to end week lower as China lockdown worries return and risk appetite sours

Front-month WTI futures fell back below the $120 per barrel mark on Friday and now trade just over $2.0 on the day and around $3.50 lower versus earlier weekly peaks in the $123 area. Both Shanghai and Beijing were back in Covid-19 alert on Thursday as cases started rising again, while parts of Shanghai have gone back into lockdown and the city has restarted mass testing.

The recent negative news serves as a reminder that China’s zero-Covid-19 policy remains a major threat to oil demand in the country, with lockdowns there in March through to May having a chilling effect on regional oil consumption, and is being cited as one factor weighing on prices on the final trading day of the week.

A sharp deterioration in risk appetite on Wall Street after data showed headline US inflation hitting a fresh four-decade peak and a widely followed Consumer Sentiment survey’s headline index fell to a new record low (going all the way back to the 70s is also weighing on crude oil prices, which tend to be sensitive to macro risk appetite.

Friday’s tumble means that WTI is now trading lower on the week by about $2.50, the first weekly decline since early May. But the US benchmark for sweet light crude oil look still to very much be locked within an uptrend that has supported prices going all the way back to early April.

China lockdown risk aside, global demand is looking very strong right now at a time when OPEC+ output is struggling, mostly as a result of Western sanctions against Russia for its invasion of Ukraine. Another development that seemed to go under the radar a little this week is Iran’s decision to start removing nearly all of the monitoring equipment installed by the International Atomic Energy Agency as part of the 2015 nuclear pact. That dents the prospect of the US and Iran agreeing to return to the deal, making the removal of sanctions on Iranian crude oil exports less likely.

Against this backdrop, dips will probably continue to be bought into in the short term, aside from any significant worsening of the China lockdown situation once again. Specifically, any dips back to the 21DMA at $115 would be particularly attractive as this level has offered strong support twice since mid-May.