The first week of May was dominated by a battle between two opposing forces: demand worries stemming from China’s prolonged COVID-19 lockdowns and the EU’s proposal to ban Russian oil imports. Dozens of major Chinese cities are currently under a full or partial lockdown, thanks to a strict COVID policy. Top of the list is Shanghai. The city’s 26 million residents are enduring a five-week and counting lockdown. In Beijing, authorities doubled down on mass testing last week in a bid to avoid the draconian lockdown measures imposed in Shanghai. China’s zero-COVID policy is taking a heavy toll on its economy. Last month, the start of strict lockdowns in Shanghai and other cities led to the worst reading of China’s factory and services sector activity in almost two years. Separately, China’s export growth slowed to single digits in April, the weakest since June 2020. Small wonder, then, why the outlook for the world’s second-biggest economy has darkened of late. This prompted credit-ratings agency Fitch Ratings to cut its forecast for China’s 2022 economic growth to 4.3% from 4.8%.

And China’s lockdown is not only putting the brakes on economic activity. It is having a commensurate effect on oil demand, with some suggesting that the country is facing the biggest oil demand shock since early 2020. By most estimates, China’s oil consumption is running at around 1 mbpd below year-ago levels. Some have even surmised that China’s oil demand will decline this year compared to 2021. The full extent of Chinese oil demand destruction has yet to be felt. Yet one thing is clear: the demand prospects in the world’s top crude oil importer are dimming with no quick recovery in sight as the COVID-19 battle trundles on.

To be sure, China’s oil demand is expected to stay weak heading into May. This is because there is no reason to expect either the strict Covid policy or its effects to change any time soon. To this extent, China’s leaders recently threatened action against critics of their zero-COVID policy. What’s more, on Friday, Chinese President Xi Jinping reaffirmed his commitment to China’s controversial zero-Covid strategy. Authorities did try and soothe market concerns by promising to roll out more support measures to stabilise the economy. However, these pledges fell on deaf ears, and with good reason. Odds are that they will unlikely reverse the disruptions caused by the restrictions. In the meantime, COVID-19 infections in Shanghai are easing but still running over 4,000 cases a day. Meanwhile, cases in Beijing are much lower but not dropping. The upshot is that nervous authorities will not lift restrictions soon and may even impose fresh lockdown measures.

Aside from China’s self-imposed economic woes, accelerating stagflation in the US and Europe also fuelled broader growth concerns. Economic growth is slowing. At the same time, inflationary pressures are gathering pace. As a result, fears about inflation and the ensuing economic pain were at the forefront of investor sentiment last week. Major central banks have been stepping up their fight against inflation by hiking rates. Even so, some believe they may have left it too late and that major economies are barrelling towards the brink of recession.

Needless to say that this spells bad news for the demand side of the oil equation. Last week, JP Morgan revised its forecast for global oil demand this year down by 1 mbpd. The bank now expects total oil demand to average 100 mbpd, 400,000 bpd below 2019 levels. Meanwhile, OPEC+ sees a surplus of 1.9 mbpd in 2022, 600,000 bpd higher from a previous forecast, citing China’s slowdown. The IEA/EIA/OPEC triumvirate forecasted weaker oil demand growth in their latest reports published in April, and a further downgrade is inevitable when they release updated projections later this week.

Yet despite the increasingly bearish demand outlook, the two leading crude markers are holding comfortably above the $100/bbl level. Brent and WTI ended last week around 5% higher as they notched their second straight weekly increase. Underpinning this positive performance was a tightening global supply backdrop amid a proposed EU embargo on Russian oil imports. After much dilly-dallying, the EU revealed plans to phase out imports of Russian oil supplies by the end of the year. The proposal met some resistance among a few of the bloc’s members, most notably Hungary. The long-time thorn in the EU’s side said the proposed ban would amount to an “atomic bomb” for its economy. EU officials subsequently tweaked plans to accommodate such concerns and a unanimous agreement is soon expected. Once ratified, it should inject another dose of bullish impetus into the oil market although gains will be kept in check by global growth concerns. For now, the ongoing clash between a supportive supply outlook and the troubled demand picture will keep oil prices more or less steady.