Oil prices drop amid China COVID curbs, possible rate hikes

© Reuters. FILE PHOTO: An oil pump of IPC Petroleum France is seen at sunset outside Soudron, near Reims, France, August 24, 2022. REUTERS/Pascal Rossignol/File Photo

By Florence Tan and Jeslyn Lerh

SINGAPORE (Reuters) -Oil prices fell on Monday with the global fuel demand outlook overshadowed by COVID-19 restrictions in China and the potential for further interest rate hikes in the United States and Europe.

Brent crude futures dropped $1.28, or 1.4%, to $91.56 a barrel by 0330 GMT, after settling 4.1% higher on Friday. U.S. West Texas Intermediate crude was down $1.34 at $85.45 a barrel, or 1.5%, after a 3.9% gain in the previous session.

Prices were little changed last week as gains from a nominal supply cut by the Organization of the Petroleum Exporting Countries (OPEC) and allies including Russia, a group known as OPEC+, were offset by ongoing lockdowns in China, the world's top crude importer.

China's oil demand could contract for the first time in two decades this year as Beijing's zero-COVID policy keeps people at home during holidays and reduces fuel consumption.

"The lingering presence of headwinds from China's renewed virus restrictions and further moderation in global economic activities could still draw some reservations over a more sustained upside," said Jun Rong Yeap, market strategist at IG.

"The overall negatives seem to outweigh the positives," said Yeap, adding the $85 mark for Brent crude prices could be in sight.

Meanwhile, the European Central Bank and the Federal Reserve are prepared to increase interest rates further to tackle inflation, which could lift the value of U.S. dollar against currencies and make dollar-denominated oil more expensive for investors.

"Demand concerns centred on the impact of rising interest rates to combat inflation and China's COVID-zero policy," Commonwealth Bank of Australia (OTC:CMWAY) analyst Vivek Dhar wrote in a note.

Still, global oil prices may rebound towards the end of the year - supply is expected to tighten further when a European Union embargo on Russian oil take effect on Dec. 5.

The G7 will implement a price cap on Russian oil to limit Russia's lucrative oil export revenue following its invasion of Ukraine in February, and plans to take measures to ensure that the oil could still flow to emerging nations. Moscow calls its actions in Ukraine "a special operation".