Oil drops 1% as rising coronavirus cases end supply-led rally

Oil prices fell on Monday, extending losses that last week ended a rally driven by production cuts and strong Chinese demand, with the market's recovery outlook being called into question as coronavirus infections rise.

Brent crude fell 45 cents, or nearly 1%, to $54.65 a barrel by 0207 GMT, after dropping 2.3% on Friday. US oil was down by 43 cents, also nearly 1%, at $51.93 a barrel, having declined 2.3% in the previous trading session.

The benchmarks had rallied in recent weeks, buoyed by the start of Covid-19 vaccine rollouts and a surprise cut of crude output by the world's biggest oil exporter, Saudi Arabia. Surging new infections throughout the world, however, have raised doubts about how long demand would hold up.

US drillers added further pressure by putting more oil and natural gas rigs to work for an eighth consecutive week last week because rising prices have made production more profitable. Still, the number of operating rigs is less than half of the level of a year ago.

"Shale producers have indicated they will continue to keep their spending under control," ANZ Research said in a note. "The economics also don't favour a surge in drilling, with half of the industry still uneconomical."

US shale producers have quickly responded to market gains in recent years, winning market share as Saudi Arabia and other major producers such as Russia have cut production in an attempt to support global oil and gas prices.

In China, where new Covid-19 infections have been rising, more than 28 million people are in lockdown as Beijing tries to avoid a resurgence of the coronavirus in the country where it was first discovered.