The global oil market is flashing warnings as demand worries about a spike

(Bloomberg) — The global oil market continues to send signals about the outlook for weaker demand. In the latest, a closely watched gauge of Asian crude oil consumption fell to a seven-month low as rising virus cases in China triggered lockdown-like restrictions in the world’s biggest importer.

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The premium on Oman futures over Dubai swaps fell below $1 a barrel on the Dubai Mercantile Exchange on Thursday. It’s down about 80% this month.

Oil markets weakened in November with a host of widely watched indicators flashing warning signs and dragging futures prices lower. Among them, fast spreads for both Brent crude and the U.S. benchmark West Texas Intermediate plunged into contango, a bearish pricing pattern that indicates ample supply in the near term. As red flags mounted, Brent futures fell to their lowest price since January earlier this week.

Expectations of a recovery in China’s oil demand are fading as daily Covid-19 cases hit record levels, prompting officials to step up containment and movement restrictions. Amid the challenges, some Chinese refiners are refraining from buying cargoes of the preferred Russian grade, reducing demand just as traders wait for more details on the Group of Seven’s plan to curb Russian oil along with European Union sanctions that begin on December 5.

Brent futures headed for a third weekly drop on Friday amid further signs from China that anti-virus restrictions in key cities are multiplying as authorities seek to quell outbreaks of Covid-19. In Beijing, the capital, which is home to 22 million people, there was a new round of curbs, with residents asked not to leave.

The Oman futures-Dubai swaps benchmark, which fell below $1 in one day in April, has mostly multi-dollar premiums since the invasion of Ukraine. It jumped to $15 in March as many buyers began to shun Russian oil, boosting the appeal of Middle Eastern crude and pushing up the premium.

As physical trading this month mostly ended for January cargoes, spot premiums for key varieties in the Persian Gulf have declined sharply. Although China’s Rongsheng Petrochemical Co. bought about 7 million barrels in the middle of the month, that was not enough to lift sentiment, traders of those varieties said.

Meanwhile, another physical market indicator – Dubai month-to-month swaps – reversed into contango on Friday, signaling a downward slide for December to April, PVM Oil Associates data showed. Before this week, the last time it was in contango was in April 2021.

Brent traded at $85.72 a barrel on Friday, after hitting $82.31 on Monday, the lowest intraday price since January.

(Adds details of Beijing outbreak in fifth paragraph.)

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