Oil price drops, new COVID sub-variant in China

• Shanghai faces more restrictions after sub-variant reported
• President Biden scheduled to visit Saudi Arabia this week

West Texas Intermediate futures dropped to near $104 a barrel after last week posting a loss in volatile trading. Concerns that the US economy may tip into a recession are hanging over the market as the central bank raises rates to combat inflation. China is also facing the prospect of more virus restrictions as Covid-19 outbreaks continue to flare.

Oil dipped below $100 a barrel last week before rebounding as the market was whipsawed by competing supply and demand outlooks. US President Joe Biden is scheduled to visit Saudi Arabia this week during tour of the Middle East as he seeks to tame rising energy prices that are weighing on the economy.

There are some signs of relief for Biden. Gasoline prices have fallen for 26 days — including the single biggest daily drop in more than a decade. It’s the longest streak of declines since April 2020. Motor fuel prices are a major contributor to inflation and a central issue in US elections.

“Very High” Risks

Shanghai reported its first case of the BA.5 sub-variant on Sunday, warning of “very high” risks as the city’s rising Covid outbreak sparks fears of a return to its earlier lockdown. The case was discovered Friday, Zhao Dandan, vice head of Shanghai’s health commission, said at a press conference.

Key data — from gross domestic product and retail sales to fiscal revenue and bank borrowing — will be closely watched to assess the damage of Covid lockdowns during April and May and the strength of the rebound since then as restrictions were eased. The figures will also give clues on the state of the property market, a major drag on growth this year. China’s economy likely expanded at the slowest rate since early 2020

Beijing is betting on a stronger second half of the year for the economy as business activity picks up pace and local governments ramp up spending on infrastructure. Even so, meeting the growth target of around 5.5% will prove challenging, especially as China sticks to its stringent Covid Zero policy, with restrictions tightened wherever outbreaks occur. President Xi Jinping recently signaled he’s willing to sacrifice some short-term growth to protect his people’s health.   

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