Energy market indices moved lower in sync with Hong Kong broad stock indices as analysts digest Covid-19's impact on major cities in China such as Shenzhen and Shanghai and possible sanctions on China by the West for its support of Russia.
Brent futures fell below $100 a barrel on Tuesday, slumping by more than $9 since the previous close. West Texas Intermediate dropped below $95, having shed more than 20% in a tumultuous past week of trading that’s seen wild price fluctuations.
NYMEX Heating Oil index moved below $3.00, an almost 9% drop.
A resurgence of Covid-19 cases in China, the world’s biggest crude importer, and ongoing developments in Ukraine have also both roiled prices in recent days.
The market is also in the midst of a liquidity crunch, leaving prices vulnerable to big swings. Clearing houses have been increasing margins -- effectively making it more expensive to trade the same amount of oil -- and open interest has collapsed to the lowest since 2015. The gap between bids and offers for WTI was six cents at times on Tuesday -- it would usually only be about half that amount -- another sign of a less active market.
In Hong Kong, the Hang Seng China Enterprises Index sank 6.6%, following a plunge in the previous session that was the biggest since the global financial crisis. Alibaba Group Holding Ltd. and Tencent Holdings Ltd. led the decline. The benchmark Hang Seng Index slumped 5.7%, its biggest decline since July 2015.
The wave of selling continued in U.S. premarket trading, with Alibaba’s American depositary receipts falling 4.6% further. Its e-commerce rivals JD.com Inc. and Pinduoduo Inc. dropped nearly 4% each. Almost all members in the Nasdaq Golden Dragon China Index were indicated lower, spanning shares of electric carmakers Nio Inc. and Li Auto Inc. to video platform Bilibili Inc. The index is at a near-decade low after $1.1 trillion in market value was wiped out from its peak last year.
China’s equities are looking increasingly risky on concerns that Beijing’s stand with Russia and its willingness to support Russian invasion of Ukraine could trigger U.S. sanctions. Chinese companies also face worries about U.S. regulatory developments including a possible delisting from the U.S. exchanges. For Chinese stocks, geo-politics outweigh fundamentals at this time. While upbeat economic data was a rare bright spot in the market, growing lockdowns in major Chinese cities following Chinese government's 'Dynamic zero policy' toward Covid-19 variant are dimming the outlook.
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