Oil plunges as new coronavirus strain renews demand recovery fears

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FILE PHOTO: The Bryan Mound Strategic Petroleum Reserve, an oil storage facility, is seen in this aerial photograph over Freeport, Texas, U.S., April 27, 2020. REUTERS/Adrees Latif/File Photo

(Reuters) -Oil prices dropped nearly 2% on Tuesday, adding to steep losses from the previous session, as a new strain of the novel coronavirus in the United Kingdom triggered concerns over fuel demand recovery.

The fast-spreading new coronavirus strain has shut down much of Britain, and has prompted several countries to close their borders to British travellers and freight.

Brent crude futures were down 88 cents, or 1.7% to $50.03 a barrel at 0730 GMT, while U.S. West Texas Intermediate (WTI) crude futures fell 92 cents, or 1.9%, to $47.05 a barrel.

Both benchmark contracts slid nearly 3% on Monday, partly erasing recent strong gains on the back of the rollout of COVID-19 vaccines, seen as key to easing mobility restrictions.

After the UK government warned that a new variant of the virus seemed to be spreading much faster than previous kinds, India, Pakistan, Russia, Jordan and Hong Kong joined European countries in suspending travel from Britain, and Saudi Arabia, Kuwait and Oman closed their borders completely.

“The nightmare before Christmas scenario has set in, with a combination of the ‘mutant virus’ compounded by Brexit angst,” said Stephen Innes, chief market strategist at Axi, referring to doubts over whether UK Prime Minister Boris Johnson can secure a post-Brexit trade deal with the European Union.

Innes said the oil market had been overbought, so the selloff was inevitable.

With the U.S. dollar rising as a safe-haven currency, U.S.-dollar priced oil is also less attractive for buyers holding other currencies, which added to pressure on prices.

“After the euphoria of vaccines roll-out and a false sense of comfort that the coronavirus is going away, the emergence of the new strain and a reality of a disorderly Brexit, traders would rather take some profit off the table given the erratic movement of markets,” said Avtar Sandu, senior commodities manager at Phillip Futures.

Traders will be keeping a close eye on U.S. crude inventory reports, due later in the week, to pick up cues on the near-term market.

A Reuters poll of analysts, conducted ahead of reports from the American Petroleum Institute later on Tuesday and the Energy Information Administration on Wednesday, projected U.S. crude stocks have likely fallen by 3.3 million barrels in the week to Dec. 18.