Oil tumbles as new virus strain revives demand fears

By Devika Krishna Kumar

NEW YORK (Reuters) -Oil prices tumbled nearly 3% on Monday as a fast-spreading new coronavirus strain that has shut down much of Britain and led to tighter restrictions in Europe sparked worries about a slower recovery in fuel demand.

Brent crude settled down $1.35, or 2.6%, at $50.91 a barrel, while U.S. West Texas Intermediate (WTI) crude for delivery in January ended the session $1.36, or 2.8%, lower at $47.74 ahead of expiry.

The more active February WTI contract fell $1.27, or 2.6%, to settle at $47.97 a barrel.

Both contracts had lost as much as $3 earlier in the session, their biggest daily drop in six months.

The strength in the U.S. dollar also weighed on oil markets. A strong greenback makes dollar-denominated commodities like crude oil more expensive to holders of other currencies.

"Reports of a new strain of the coronavirus have weighed on risk sentiment and oil. New mobility restrictions across Europe are also not helping as European oil demand will suffer," said UBS oil analyst Giovanni Staunovo.

"Investors need to be mindful that the road to higher oil demand and prices will remain bumpy."

Brent climbed above $50 last week for the first time since March, buoyed by optimism stemming from COVID-19 vaccines.

But a new COVID-19 strain, said to be up to 70% more transmissible than the original, has renewed fears about the virus, which has killed about 1.7 million people worldwide.

More countries closed their borders to Britain on Monday, causing travel chaos and raising the prospect of UK food shortages.

"The new strain of the coronavirus in the UK has shown us that the vaccine optimism holding Brent above $50 per barrel could be deflated in a fleeting moment," said Rystad Energy analyst Louise Dickson.

The new virus strain has already been detected in other countries, including Australia, the Netherlands and Italy.

Russian Deputy Prime Minister Alexander Novak said the new strain had an impact on oil prices, adding that recovery of global oil markets was happening more slowly than previously expected and could take two to three years.

"Travel restrictions over the next several weeks will complicate OPEC+ plans to gradually raise output," said Edward Moya, senior market analyst at OANDA in New York.

"The monthly meetings will be very tense and keep oil prices volatile until the virus spread is under control across both Europe and the U.S."

The negative sentiment largely overshadowed the rollout of a new vaccine in the United States, a deal among U.S. congressional leaders for a $900 billion coronavirus aid package and European regulatory approval on Monday for the use of the COVID-19 vaccine jointly developed by U.S. company Pfizer Inc and its German partner, BioNTech.

The approval by Europe's medicines regulator puts the region on course to start inoculations within a week.

(Reporting by Devika Krishna Kumar in New York and Bozorgmehr Sharafedin in London; Additional reporting by Yuka Obayashi in Tokyo; Editing by Steve Orlofsky, Matthew Lewis and Peter Cooney)