China has begun implementing a city-wide lockdown in Shanghai, a major financial and industrial center, sending worldwide oil prices tumbling.
The price of oil, also known as Brent crude, fell more than $4.50 on concerns that the move would imply that demand for oil will fall.
The Shanghai Composite stock index fell in the early session before recouping most of its losses later in the day.
The lockdown, which began on Monday, is the country’s biggest since the coronavirus outbreak started in 2019.
The price of a futures contract for Brent crude, an international oil benchmark, fell 4% to $115.80 per barrel.
Despite the drop, oil prices in the world market are still more than 80% higher than they were a year ago as a result of the Ukraine conflict.
Traders were worried about the efficacy of China’s zero-tolerance policy toward Covid, according to Stephen Innes, managing partner at SPI Asset Management.
According to a recent research note from Mr. Innes, there are expectations of additional supply chain disruptions as well as a fall in demand.
“Maybe we’re just dealing with the very tip of the iceberg,” he added.
However, Dan Wang, chief economist at Hang Seng Bank China, does not anticipate the capital freeze to have a significant impact on supply chains.
Given that most factories continue to operate as normal, and employees are being confined on-site or given priority testing, the Shanghai-based economist said.
“The suburbs are controlled quite tightly and efficiently,” she continued. “Supply chain stability is a critical concern in this cycle.”
“We do not know how many businesses will fail in the next year,” she said, adding that given Covid’s increase, there were expectations of greater government stimulus and interest rates would most likely be lowered “quite significantly.”
Low interest rates make it less expensive for companies and individuals to borrow money as long as they are transferred by banks.
Meanwhile, the Shanghai Composite stock index dropped on Monday before recovering to close 0.07% higher.
Up to now, Chinese officials had resisted closing down the country’s almost 25 million-person metropolis in order to avoid jeopardizing China’s second-largest economy.
During the second stage, authorities will carry out Covid-19 testing in two phases. The city will be locked down for a total of nine days as authorities execute Covid-19 testing.
The financial capital, which has been battling a new wave of infections for almost a month, however case counts are not particularly high by international standards.
The latest suspension comes after three lockdowns in China earlier this month, including the entire Jilin province and the technology mecca of Shenzhen.
Shanghai’s public transportation has been shut down, and businesses and factories in the city have been instructed to cease operations or work remotely.
Beginning on Monday, the southern part of the city, which includes China’s financial center, will be sealed off.
From Friday, the city of Shanghai will be reduced to a single-party state. The rotation will allow half of the city to keep operating.
Many businesses in Shanghai had already closed their doors due to the epidemic. For nearly a month, the city has been battling a new wave of Covid infections.
Last week, the Shanghai Disney Resort announced that it will remain closed until further notice due to the “current epidemic situation.”