Oil drops on Ukraine peace talk hopes, China demand fears

Oil prices dropped on Tuesday, extending losses from the previous day as Ukraine and Russia headed for peace talks and on fears of a drop in fuel demand in China after the financial hub of Shanghai shut down to curb a surge in COVID-19 cases.

Brent crude futures were trading down $1.18, or 1.1%, at $111.30 a barrel at 0348 GMT, having dipped as low as $109.97.

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U.S. West Texas Intermediate (WTI) crude futures hit a low of $103.46 in an early trade and were down $1.09, or 1.0%, at $104.87. Both benchmark contracts lost around 7% on Monday.

Ukraine and Russia were set to meet in Istanbul on Tuesday for their first peace talks in over two weeks. Sanctions imposed on Russia after it invaded Ukraine have curtailed oil supply and earlier this month sent prices to 14-year highs.

Russia calls its actions in Ukraine a "special operation" to disarm its neighbour.

"Oil prices are under pressure again on expectations for a peace talk between Ukraine and Russia, which could lead to an easing of sanctions or avoidance on Russian oil by the West," said Hiroyuki Kikukawa, general manager of research at Nissan Securities.

"A successful ceasefire could also raise the prospect of reviving an Iranian nuclear deal," he added.

Offsetting concerns about tight supply, Shanghai`s two-stage lockdown over nine days is expected to hit fuel demand in China, the world`s largest oil importer. The country`s financial hub accounts for about 4% of China`s oil consumption, ANZ Research analysts said.

"Selling pressure grew on concerns that China may impose more restrictions in other places to contain the pandemic and fuel demand may be reduced further," said Tsuyoshi Ueno, senior economist at NLI Research Institute.

"Increased market volatility has made it difficult for long-term investors to participate, as short-term investors tend to take profits or cut losses more quickly than before," he added.

The market is also waiting on a planned meeting on Thursday by the Organization of the Petroleum Exporting Countries (OPEC) and allies, collectively known as OPEC+.

The group will likely stick to plans for a modest increase in oil output in May, several sources close to the group said, despite a surge in prices due to the Ukraine crisis and calls from the United States and other consumers for more supply.

Worldwide demand has risen to nearly pre-pandemic levels, but supply has been hindered, as OPEC+ has been slow to restore supply cuts enacted during the pandemic in 2020.

U.S. oil exports have climbed after Russia`s invasion of Ukraine, and barrels of domestic oil that would typically go to the Cushing, Oklahoma, storage hub are instead being exported via the Gulf Coast, traders said.