WTI consolidates in mid-$104.00s as traders weigh China demand woes against expected EU/Russia oil embargo

• WTI is consolidating in the mid-$104.00s, near the middle of its recent short-term $100-$108ish range.
• Traders continue to juggle the bearish theme of China lockdown worries with the bullish theme of an EU/Russia oil embargo.

Since the start of Tuesday’s European session, front-month WTI futures have been swinging between lows in the $103.00 per barrel area and highs in the $105.00 area, as traders weigh the prospect of an impending EU embargo on Russian oil imports against China lockdown concerns. At current levels in the mid-$104.00s, WTI is trading ever so slightly in the red on the day and is around the midpoint of its $100-$108ish ranges of the past five or so sessions.

The news coming out of China suggests that authorities are continuing to struggle to get a Covid-19 outbreak in Beijing under control, with a further 51 infections reported on Tuesday. Restaurants in the Chinese capital are now closed for indoor dining, apartment blocks where cases are being picked up are being put under quarantine, residents of the city are being encouraged not to leave and the reopening of schools has been postponed for at least a week after the Labour Day holidays, local press reported.

If Beijing follows down the same path as Shanghai, i.e. goes into a strict city-wide lockdown, this will further dent already diminished crude oil demand in China, a big downside risk that WTI traders must monitor. However, traders must juggle this against an announcement of an EU-wide embargo on Russian oil imports that is likely to be confirmed later this week. According to Internation Energy Agency forecasts, Russian output has likely already fallen by 3M barrels per day this month versus prior to the country’s invasion of Ukraine as a direct result of Western sanctions.

“A potential EU-wide oil embargo could significantly undermine the already diminishing availability of Russian barrels,” said one analyst at oil broker PVM. For now, Russia output fears are preventing WTI from falling back below $100 due to China demand woes. Aside from the aforementioned themes, WTI traders will also be watching upcoming US Private Weekly API crude oil inventory data out at 2130BST on Tuesday ahead of official US inventory numbers on Wednesday. Attention will then turn to the broader macro backdrop, with oil traders likely to monitor how risk appetite responds to this week’s Fed meeting and US jobs report.