Oil prices skid as new coronavirus strain fuels demand worries

Oil prices dropped more than 3 per cent on Monday, as a fast-spreading new coronavirus strain that has shut down much of Britain and led to tighter restrictions in Europe fuelled worries about a slower recovery in fuel demand.

Brent crude slid $1.74, or 3.3 per cent, to $50.52 a barrel by 0745 GMT after rising 1.5 per cent to its highest since March on Friday. US West Texas Intermediate (WTI) crude was down $1.66, or 3.4 per cent, to $47.44 a barrel after also climbing 1.5 per cent on Friday to its highest since February.

Monday's declines come after seven weeks of gains in prices amid optimism stemming from the rollout of Covid-19 vaccines.

"The oil market has been on a bull trend in the past month or so, ignoring negative factors, amid an optimism that a widening vaccine rollout would revive global growth," said Kazuhiko Saito, chief analyst at commodities broker Fujitomi.

"But investors' rosy expectations for 2021 have suddenly vanished due to a new variant of the virus."

Money managers had raised their net long US crude futures and options positions in New York and London by 2,046 contracts to 321,332 in the week to December 15, according to the US Commodity Futures Trading Commission (CFTC).

"A tougher lockdown in Britain to fight a new strain of coronavirus and travel restrictions in other European countries led funds to unwind their long positions," said Chiyoki Chen, chief analyst at Sunward Trading. Concerns over dragging Brexit talks was also denting market sentiment, Chen added.

"Brent may fall below $50 a barrel and WTI may drop below $45 this week as investors want to adjust positions ahead of Christmas holidays," Chen said.

British Prime Minister Boris Johnson will chair an emergency response meeting on Monday to discuss international travel and the flow of freight in and out of Britain as Covid-19 cases surged by a record number for one day. Officials say the new virus strain is up to 70 per cent more transmissible than the original.

Johnson also seeks to hammer out a final accord on Brexit.

The negative sentiment overshadowed a weekend deal among US congressional leaders for a $900 billion coronavirus aid package.

Adding to the pressure, the US oil and gas rig count, an early indicator of future output, rose by eight to 346 in the week to December 18, the highest since May, Baker Hughes said, as producers keep returning to the well pad with crude prices trading above $45 a barrel since late November.

Russian Deputy Prime Minister Alexander Novak said on Saturday that global oil demand was still between 6-7 million barrels per day (bpd) below pre-crisis levels.