Oil prices drop amid threat of demand fall due to Covid-19 flare up in Europe

The fall led to a reversal of gains from the previous session, amid growing talk that the United States, Japan and India will release crude reserves to tame prices

Oil prices dropped on Tuesday, reversing gains in the previous session, on growing talk that the United States, Japan and India will release crude reserves to tame prices despite the threat of demand faltering as Covid-19 cases flare up in Europe.

The US Department of Energy is expected to announce an oil loan from the Strategic Petroleum Reserve on Tuesday, and will be coordinated with other countries, a Biden administration source familiar with the situation said.

Also read — In a first, Japan considers release of oil reserves after US request

US West Texas Intermediate (WTI) crude futures fell 43 cents, or 0.6 per cent, to $76.32 a barrel at 6.58 am. Brent crude futures fell 30 cents, or 0.4 per cent, to $79.40 a barrel.

Brent and WTI both rose 1 per cent on Monday on reports that the Organization of the Petroleum Exporting Countries (OPEC), Russia and their allies, together called OPEC+, could adjust their plan to raise oil production if large consuming countries release crude from their reserves or if the pandemic dampens demand.

With talk of a coordinated crude release having succeeded in driving prices back below $80 a barrel and an actual release only expected to have a temporary impact, analysts are turning their attention to the potential hit to demand from a fourth wave of Covid-19 cases in Europe.

Also read — Consumers sigh in relief as fuel prices remain static

"As Europe, and in particular Eastern Europe, struggles to halt the spread of Covid-19, the risk of lockdown-like measures looms large," said Rystad Energy analyst Louise Dickson.

She said that demand in November for road and jet fuel in Europe is expected to fall to 7.8 million barrels per day (bpd) from 8.1 million bpd in October, although part of that is a normal decline for this time of year.

"If a new wave of lockdowns is enacted in Europe, oil prices will not be spared during the remainder of the flu season in the North Hemisphere," Dickson said in emailed comments.

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