• WTI is a little lower but still trading near $120, weighed slightly amid risk-off conditions and China lockdown worries.
• Weak US data, a surprisingly hawkish Fed and tough restrictions in China could combine to send WTI towards its 21DMA.

Though still a little lower on the day, oil prices pared the bulk of earlier session losses on Monday, despite steep downside in global risk assets as investors fretted about last Friday’s hotter than expected US inflation and its implications for Fed monetary policymaking, as well as increasing signs that the US economy might be headed for recession. Front-month WTI futures were last trading a few cents in the red in the $120 per barrel area, having bounced from earlier session lows near $118.

Traders cited China Covid-19 developments, after Beijing and Shanghai both moved to reimpose restrictions as Covid-19 infections rose once again, as weighing on the price action, as well as the market’s risk-off mode that has seen the US dollar strengthen. A strong buck means USD-denominated commodities are more expensive for international buyers.

But the bounce from mid-session lows suggests that appetite to buy the dip remains strong, for now. Indeed, global oil markets are still very tight as demand in the northern hemisphere rises towards its summer peak and OPEC+ supply woes show no signs of abating, with Russian output still languishing in the face of strict Western sanctions and as smaller (mainly African) producers struggle amid a lack of investment and amid instability.

Meanwhile, the prospect of a return by the US and Iran to compliance with the 2015 nuclear pact which could set the stage for well over 1 million barrels per day in Iranian exports to return to global markets appeared to have been dealt a death blow last week. Amid a spat with global nuclear watchdog the International Atomic Energy Agency (IAEA), Iran is set to remove nearly all equipment that had been used by the organisation to monitor its nuclear activities.

But traders should be aware that amid the risk that 1) the China lockdown worsens, threatening oil demand in the country, 2) further US data this week points to a recession and 3) the Fed on Wednesday delivers a hawkish surprise as inflation continues to surprise to the upside, oil might be in for a rough time. A test of the 21-Day Moving Average in the mid-$115s seems a solid possibility.