Oil prices have dropped by around $1 a barrel as Covid19 weakens demand from China, and the US dollar rebounds.

Oil prices down ahead of US Fed interest rate decision.
Oil prices down ahead of US Fed interest rate decision. (AA)

Oil prices dropped to near two-month lows on Monday, sliding by around $1 a barrel, as supply fears receded while concerns over fuel demand from China and US dollar strength weighed on prices.

Brent crude futures for January had slipped 87 cents, or 1%, to $86.75 a barrel by 04:36 GMT.

US West Texas Intermediate (WTI) crude futures for December were at $79.21 a barrel, down 87 cents or 1.1%, ahead of the contract's expiry later on Monday. The more active January contract last fell 69 cents or 0.9% to $79.42 a barrel.

Both benchmarks closed Friday at their lowest since Sept. 27, extending losses for a second week, with Brent down 9% and WTI 10% lower.

"Apart from the weakened demand outlook due to China's Covid19 curbs, a rebound in the US dollar today is also a bearish factor for oil prices," said Tina Teng, a CMC Markets analyst.

"Risk sentiment becomes fragile as all the recent major countries' economic data point to a recessionary scenario, especially in the U.K. and euro zone," she said, adding that hawkish comments from the US Federal Reserve last week also sparked concerns over the US economic outlook.

New Covid19 case numbers in China remained close to April peaks as the country battles outbreaks nationwide and in major cities. Schools in Beijing districts buckled down for online classes on Monday after officials asked residents to stay home amid rising cases.

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The front-month Brent crude futures spread narrowed sharply last week while WTI flipped into a contango, reflecting dwindling supply concerns.

Meanwhile, tight crude supplies in Europe have eased as refiners have piled up stocks ahead of the Dec. 5 European Union embargo on Russian crude, putting pressure on physical crude markets across Europe, Africa and the United States.

The EU's energy policy chief told the Reuters news agency the EU expected to have its regulations completed in time for the introduction of a G7 plan to cap the price of Russian crude on Dec. 5.

RBC Capital analyst Mike Tran said the weak December WTI contract expiration indicated paper market selling rather than true physical market softness.

"Tight global inventories do not support the traditional surplus of barrels rationale for contango," he said in a note.

While North Sea and West African spot market indicators are far from strong, they are also not suggesting signs of distress, he added.

Diesel markets remained tight, with Europe and the United States competing for barrels. While China nearly doubled its diesel exports in October from a year earlier to 1.06 million tonnes, the volume was well below September's 1.73 million tonnes.

Demand in China, the world's top crude importer, remains bogged down by Covid restrictions while expectations of further interest rate rises elsewhere have elevated the greenback, making dollar-denominated commodities more expensive for investors.

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Source: Reuters