Oil prices close 6% lower to start the week as Saudis lower prices, China exports slump

Price action

• West Texas Intermediate crude for June delivery
  CL.1,
  -6.39%

  CL00,
  -6.39%

  CLM22,
  -6.39%
  dropped $6.68, or 6.1%, to settle at $103.09 a barrel on the New York Mercantile Exchange. It was the U.S. benchmark’s biggest one-day drop since March 31.

• July Brent crude 
  BRN00,
  -0.41%

  BRNN22,
  -0.41%,
  the global benchmark, dropped $6.45, or 5.7%, to close at $105.94 a barrel, its largest one-day drop since March 28.

• June natural-gas futures 
  NGM22,
  -11.59%
  tumbled 12.6% to end at $7.026 per million British thermal units, its biggest daily percentage drop since Jan. 22, 2019.

• June gasoline 
  RBM22,
  -3.35%
  fell 3.1% to finish at $3.6419 a gallon, while June heating oil 
  HOM22,
  -3.33%
  dropped 3% to $3.8349 a gallon.

Market drivers

Saudi Arabian oil company Saudi Aramco said Sunday that it reduced oil prices of all types of crude for Europe, Asia, Europe and the Mediterranean for June. The biggest cuts were seen in the Mediterranean. U.S. prices were unchanged.

Asian consumers will need to pay a premium of $4.40 per barrel for Arab Light, following a premium in May that hit a record high of $9.35, noted Carsten Fritsch, analyst at Commerzbank, in a note to clients.

“Apart from the particularly high OSP beforehand, one reason why Saudi Arabia is willing to make such high price concessions to its Asian consumers may be concerns about a loss of market shares. Russian Urals type oil is still trading at a very substantial discount of $24.5 vis-à-vis Brent, which makes it attractive to those Asian consumers who have not signed up to the West’s sanctions against Russia,” said Fritsch.

Losses for crude deepened as equity markets tumbled, with the Dow Jones Industrial Average
DJIA,
-1.62%
down around 650 points at its session low, while the S&P 500
SPX,
-2.86%
slumped 2.7% after trading at its lowest since April 2021.

“Oil prices are dropping fast as crude demand destruction fears grow given China’s COVID situation and the de-risking event happening with U.S. stocks,” said Edward Moya, senior market analyst at Oanda, in a note.

The markets brushed aside news that G-7 countries agreed on the weekend on a gradual import ban for Russian oil, as that country’s forces continued to bear down on Ukraine.

Meanwhile, the market was reminded of China’s fragile economy to start the week, after data showed exports rose just 3.9% on year in April, after a blistering 14.7% gain in March. The slowdown came as COVID lockdowns hit supply chains and closed factories, adding to worries about growth in the world’s No. 2 economy.

Investors are already concerned that the Federal Reserve won’t get the balance right in its interest rate increases, which could possibly trigger a recession.

Ole Hansen, head of commodity strategy at Saxo Bank, said fresh data showed speculators cut some bullish commodity bets across 24 major futures contracts to a four-month low in the week to May 3.

“Driven by China lockdowns, rising inflation and monetary tightening have led to a loss of momentum, especially across industrial and precious metals. From a recent prewar and pre-China lockdown peak on Feb. 22 the net long in energy is, despite strong price gains, down by 23%, the metal sector is down 67% while the agriculture sector is up 2% led by softs,” he said, in a note to clients.

Hansen said multiyear highs for refined products were already hurting demand in that sector in the energy space.