Oil drops over 3% as some concerns about supply recede in light of Russia-Ukraine peace talks

• Crude oil fell by as much as 5% on Monday, with Brent trading below $110 a barrel, having almost hit $140 last week.
• Russia and Ukraine were holding peace talks Monday, which helped ease some fears about the hit to supply from sanctions.
• China has put Shenzhen into lockdown, raising fears of a fall in demand as COVID-19 cases grow.

Oil fell as much as 5.1% on Monday, under pressure from easing concerns about supply shortages, as Ukraine and Russia prepared for more peace talks, and as a rise in Covid cases in China thrust the commodities hub of Shenzen into a week-long lockdown. 

Brent crude futures were last down 4.4% at $107.80 a barrel by 07:25 a.m. ET, having hit a session low of $106.89 earlier on, while West Texas Intermediate lost 5.3% to trade around $103.59 a barrel.

Last week was highly volatile for oil as the price fluctuated between 8-year highs of almost $140 a barrel and lows of around $105 on supply concerns surrounding the ongoing crisis in Eastern Europe, after US and UK bans on Russian energy imports sparked fears that other big consumers could do the same. Russia is the world’s third-largest producer of crude oil.

“Oil markets in Asia have staged an unconvincing pullback today in hopes that Ukraine-Russia negotiations are moving to a constructive stage, despite the weekend widening of the Russian bombing,” according to Jeffery Halley, senior markets analyst at Oanda.

Representatives from Russia and Ukraine were holding diplomatic talks on Monday via video link, which supported markets, but the mood among investors is extremely cautious and price action is likely to remain volatile, Halley said.

“All of that is a most ambitious reason to price in peak oil in my opinion, but I do acknowledge that any improvement in Eastern Europe could provoke a very sharp and deep sell-off,” he said.

Meanwhile, Covid cases are rising for the first time in two years in the Chinese trading hub of Shenzhen, forcing the city into lockdown, closing factories, the port and even the city’s stock exchange. China is a huge importer of crude oil and other commodities. Any knock to demand there could have implications for global consumption. 

Analysts at ING also noted this issue may last longer than the week the city is going to spend in lockdown, given the government’s commitment to its zero-Covid policy.

“However, the market could be focusing more on the latest Covid developments in China. More than 3,300 new cases were reported on 12 March. The rising number of cases has seen the city of Shenzhen go into lockdown. This will raise concern over the potential hit to demand. But also importantly, it suggests that China is not ready to let go of its zero-Covid policy,” Warren Patterson, ING head of commodities strategy, said.