Oil falls on Beijing's COVID-19 warning, inflation worries

© Reuters. FILE PHOTO: Oil rigs are seen at Vaca Muerta shale oil and gas drilling, in the Patagonian province of Neuquen, Argentina January 21, 2019. REUTERS/Agustin Marcarian/File Photo

By Alex Lawler

LONDON (Reuters) -Oil dropped more than $2 on Monday as a flare-up in COVID-19 cases in Beijing dented hopes of a pick-up in Chinese demand, while worries about more interest rate hikes to control rampant inflation added further pressure.

Beijing's most populous district Chaoyang announced three rounds of mass testing to quell a "ferocious" COVID-19 outbreak.

Concern about further rate hikes, heightened by Friday's U.S. inflation data, weighed across financial markets.

Brent crude was down $2.34, or 1.9%, to $119.67 at 0815 GMT, while U.S. West Texas Intermediate crude was down $2.36, or 2%, at $118.31.

"The present price fall is exacerbated by warnings of a 'ferocious' spread of the COVID virus in Beijing by officials, casting doubt on immediate demand recovery," said Tamas Varga of oil broker PVM.

Oil has surged in 2022 as Russia's invasion of Ukraine compounded supply concerns and as oil demand recovered from COVID lockdowns. Brent hit $139, the highest since 2008, in March, and both oil benchmarks rose more than 1% last week.

Supply remains tight, with OPEC and its allies unable to deliver in full on pledged output increases because of a lack of capacity in many producers, sanctions on Russia, and output in Libya roughly halved by unrest.

"The supply/demand dynamics remain supportive of prices," said Jeffery Halley of brokerage OANDA, who sees an extended oil sell-off as unlikely "unless U.S. markets move to price in a full-blown recession."

Equities fell in Asia and made early losses in Europe as Friday's data showing the U.S. consumer price index rose 8.6% last month continued to weigh on financial markets. [MKTS/GLOB]

The data put markets on alert that the Federal Reserve may tighten policy for too long and cause a sharp economic slowdown. The next Fed policy decision is on Wednesday.