The United States Oil ETF USO traded lower once again on Monday as traders weigh potential supply tightness from a major pipeline shutdown with the possibility of demand weakness if the economies of U.S. and China slow.
Pipeline Shutdown: On Monday, the Nord Stream pipeline, which connects Russia’s Siberian gas fields with Germany and serves as a main channel for Russian gas to Europe, was shut down for scheduled maintenance. The shutdown stoked fears that Russia will shut down the pipeline for good at some point in retaliation to international sanctions against Russia.
Under normal circumstances, the Nord Stream shutdown would likely trigger a spike in energy prices, but investors are also growing increasingly concerned about a drop-off in energy demand, particularly in China.
A new outbreak of COVID-19 in Shanghai could trigger a large shutdown of the city, which would hurt fuel demand. In addition, U.S. investors are growing increasingly concerned that inflation and higher interest rates will send the economy into a recession.
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Markets React: WTI crude oil prices were down 1.8% on Monday to around $102.88 per barrel, while Brent crude prices dropped 1.4% to $105.52. The United States Natural Gas Fund, LP UNG jumped 7.5% in response to the Nord Stream shutdown, but the Energy Select Sector SPDR Fund XLE was down 2% in early trading.
JPMorgan analysts said a severe economic depression scenario could drive Brent crude oil prices down to $78/bbl, while a significant retaliatory reduction of Russian oil exports could push Brent prices to as high as $190/bbl.
Benzinga's Take: There are a lot of developments for oil and gas investors to monitor in coming weeks. The biggest threats to crude oil prices to the downside are a severe outbreak of COVID-19 in China and more elevated inflation numbers in the U.S. suggesting a recession could be just around the corner. However, if Russia decided to cut off its supply of oil and gas to the West, the huge spike in energy prices so far in 2022 may be just getting started.
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