Oil prices hold above $70 after two-day rally

© Reuters. FILE PHOTO: A pump jack stands idle in Dewitt County, Texas January 13, 2016. REUTERS/Anna Driver

By Ron Bousso

LONDON (Reuters -Oil prices dropped on Wednesday but stayed above $70 a barrel, taking a breather after recent days' strong rally as Mexico was set to resume crude production following a major outage.

Brent crude fell 33 cents, or 0.46%, to $70.72 a barrel by 0904 GMT, while U.S. West Texas Intermediate (WTI) crude was down 40 cents, or 0.59%, to $67.14.

Both benchmark contracts rose by about 8% over the previous two days. The rally erased most of the slump from a seven-day losing streak on the back of a resurgence in COVID-19 cases.

"A second consecutive day of price rally in the crude market had also spurred some profit-taking, while American Petroleum Institute data showing a less-than-expected decline in U.S. oil inventories last week added to the downward pressure," Vandana Hari said in a note to clients.

Prices rallied in previous sessions after Mexican supply fell by more than 400,000 barrels per day after a fire on an oil platform. The state oil firm said it expected to resume production by Aug. 30.

"Brent crude should remain fairly supported here despite today's weakness as the oil market is still heavily in deficit and that won't change anytime soon," Edward Moya, senior market analyst at OANDA, told Reuters.

American Petroleum Institute data showed crude inventories fell 1.6 million barrels for the week ended Aug. 20, while gasoline stockpiles fell 1 million barrels, according to sources, who spoke on condition of anonymity.

Analysts were expecting crude stockpiles to fall by 2.7 million barrel and gasoline stocks to drop by 1.6 million barrels, according to a Reuters poll.

Official data from the U.S. Energy Information Administration is due to be released on Wednesday at 1430 GMT.

Last week's losses were driven by fears that the spread of the highly contagious Delta variant of the coronavirus in Asia would slow the region's economic recovery.

In a promising sign that the spread of Delta infections was easing in China, the country on Wednesday reported just 20 new confirmed coronavirus cases for Aug. 24, down from 35 a day earlier.

(Additinoal reporting by Roslan Khasawneh in Singapore and Sonali Paul in Melbourne; Editing by Shri Navaratnam and Edmund Blair)