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Oil prices drop 3% as new COVID-19 strain causes demand worries

Oil prices dropped about 3% on Monday as a fast-spreading new coronavirus strain that has shut down much of the United Kingdom fuelled worries over a slower recovery in fuel demand amid tighter restrictions in Europe.

Brent crude slid $1.54, or 3.0%, to $50.72 a barrel by 0510 GMT after rising 1.5% and touching its highest since March last Friday.

U.S. West Texas Intermediate (WTI) crude was down $1.42, or 2.9%, to $47.68 a barrel after also climbing 1.5% on Friday to its highest level since February.

Monday's declines came after oil prices marked seven straight weeks of gains last week as investors focused on the rollout of COVID-19 vaccines.

"A tougher lockdown in Britain to fight a new strain of coronavirus and travel restrictions in other European countries led funds to unwind their long positions," said Chiyoki Chen, chief analyst at Sunward Trading, adding concern over dragging Brexit talks also dented market sentiment.

"Brent may fall below $50 a barrel and WTI may drop below $45 this week as investors want to adjust positions ahead of Christmas holidays," Chen said.

British Prime Minister Boris Johnson will chair an emergency response meeting on Monday to discuss international travel and the flow of freight in and out of Britain as COVID-19 cases surged by a record number for one day. The headache comes as Johnson also seeks to hammer out a final accord on Brexit.

The variant, which officials say is up to 70% more transmissible than the original, also prompted concerns about a wider spread, forcing several European countries to begin closing their doors to travellers from the United Kingdom.

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With progress in vaccine rollouts, money managers had raised their net long U.S. crude futures and options positions in the week to Dec. 15, according to the U.S. Commodity Futures Trading Commission (CFTC).

"The oil market has been on a bull trend in the past month or so, ignoring negative factors, amid an optimism that a widening vaccine rollout would revive global growth, but investors' rosy expectations for 2021 have suddenly vanished due to a new variant of the virus," said Kazuhiko Saito, chief analyst at commodities broker Fujitomi Co.

The negative sentiment also overshadowed a weekend deal among U.S. congressional leaders for a $900 billion coronavirus aid package.

Adding to pressure, the oil and gas rig count, an early indicator of future output, rose by eight to 346 in the week to Dec. 18, the highest since May, Baker Hughes said on Friday, as producers keep returning to the wellpad with crude prices trading above $45 a barrel since late November.

Meanwhile, Russian Deputy Prime Minister Alexander Novak said on Saturday that global oil demand was still between 6 and 7 million barrels per day (bpd) below pre-crisis levels.

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