Oil falls as China COVID spike dampens demand outlook

[December 29, 2022]  By Rowena Edwards

LONDON (Reuters) -Oil prices pared losses after falling by over $2 earlier in the session, as a weaker dollar partially offset demand fears resulting from surging COVID-19 cases in China.

Brent futures for February fell 96 cents, or 1.15%, to $82.30 a barrel by 1208 GMT. The more active March contract fell 1.2% to $82.98/bbl, after falling by over $2 earlier in the session.

U.S. West Texas Intermediate crude futures fell $1.13, or 1.43%, to $77.83 a barrel, after reaching session lows of $76.79.

The contracts pared losses as the U.S. dollar slipped, with investors on edge at the end of the year as initial optimism over China's reopening fizzled.

A weaker dollar makes oil cheaper for holders of other currencies and can boost demand.

The scale of the latest Chinese COVID outbreak and doubts over official data prompted some countries to enact new travel rules on Chinese visitors, even as the world's largest crude oil importer began dismantling the world's strictest COVID regime of lockdowns and testing.

"The lack of clarity over the virus situation in China has prompted some new travel rules from various countries, which could serve as some dampener for previous optimism," said Jun Rong Yeap, market strategist at IG.

Oil markets were also buffeted by expectations of another U.S. interest rate increase, as the Federal Reserve tries to limit price rises in a tight labour market.

Pumpjacks are seen against the setting sun at the Daqing oil field in Heilongjiang province, China December 7, 2018. Picture taken December 7, 2018. REUTERS/Stringer

U.S. crude oil inventories fell less than expected, by about 1.3 million barrels, in the week ended Dec. 23, according to market sources citing American Petroleum Institute figures. [API/S]

The U.S. government will release its weekly figures at 10:30 a.m. EST (1530 GMT) on Thursday.

Markets, however, drew some support from Russian President Vladimir Putin's ban on exports of crude oil and oil products from Feb. 1 for five months to nations that abide by a Western price cap.

Russian oil pipeline operator Transneft said Kazakhstan's KazTransOil had requested an additional 1.2 million tonnes of capacity on the Druzhba pipeline for 2023 to facilitate extra oil shipments to Germany, the RIA Novosti news agency reported.

The U.S. refilling its strategic petroleum reserves "should be supportive for the market and could have put a bit of a floor in place," said Craig Erlam, senior market analyst at OANDA.

(Additional reporting by Jeslyn Lerh in Singapore; Editing by Emelia Sithole-Matarise and Chizu Nomiyama)

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