Oil drops as China demand concerns counter supply jitters

© Reuters. A view shows oil tanks of Transneft oil pipeline operator at the crude oil terminal Kozmino on the shore of Nakhodka Bay near the port city of Nakhodka, Russia August 12, 2022. REUTERS/Tatiana Meel

By Shariq Khan

NEW YORK (Reuters) -Oil prices fell more than a dollar a barrel on Monday as China’s ailing property sector sparked demand worries, causing traders to reassess the supply risk premium from escalating tensions in the Middle East.

Brent crude futures fell $1.22, or 1.5%, to $82.33 a barrel by 12:56 pm ET (1756 GMT), while U.S. West Texas Intermediate crude futures were down $1.24, or 1.6%, at $76.77 per barrel.

Both benchmarks gained about 1.5% earlier on Monday, with Brent prices touching their highest since early Nov. after a fuel tanker was hit by a missile in the Red Sea and U.S. troops were attacked in Jordan near the Syrian border. The events mark a major escalation of tensions that have engulfed the Middle East.

However, prices have since retreated as attention shifted to China, the world’s largest oil importer, where a real estate crisis deepened with a Hong Kong court ordering the liquidation of property giant China Evergrande (HK:3333) Group.

“The situation in China is the biggest headwind to the whole market, that is why the market keeps backing off from the war risk premium,” said John Kilduff, partner at Again Capital LLC.

Market participants were also questioning how much the risk premium should be as oil supplies have not yet been directly affected by the Middle East crisis.

“Currently we are seeing a premium of around $10 a barrel when it should really just be $3 or $4 based on true petroleum demand fundamentals,” said Gary Cunningham, director at energy advisory firm Tradition Energy.

Meanwhile, lingering high interest rates were also in focus after European Central Bank policymakers were unable to reach a consensus on Monday over when interest rates should be cut.

Russia, meanwhile, is likely to cut exports of naphtha, a petrochemical feedstock, by between 127,500 and 136,000 barrels per day – about a third of its total exports – after fires disrupted operations at Baltic and Black Sea refineries, according to traders and LSEG ship-tracking data.

Another Russian oil facility came under attack on Monday, with Russian authorities indicating they had thwarted a drone attack on the Slavneft-YANOS refinery in the city of Yaroslavl.

U.S. crude oil and distillates inventories were expected to have reduced last week while gasoline stocks were seen rising, according to a preliminary Reuters poll.

The American Petroleum Institute will publish its U.S. stockpiles data on Tuesday around 4:30 pm ET. Official data from the Energy Information Administration is due on Wednesday at 10:30 am ET.