Oil drops in light trading on China demand concern

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By Shariq Khan

NEW YORK (Reuters) -Oil prices dipped on Wednesday as traders weighed concerns over a surge in COVID-19 cases in China, the world's top oil importer, against the chances easing pandemic restrictions in the country will boost fuel demand.

Brent crude futures fell $1.39, or 1.7%, to $82.94 a barrel by 1:10 p.m. EST [1810 GMT], while U.S. West Texas Intermediate crude futures fell $1.12, or 1.4%, to $78.41 per barrel.

China said it will stop requiring inbound travellers to go into quarantine from Jan. 8, a major step towards relaxing stringent curbs on its borders. However, Chinese hospitals have been under intense pressure due to a surge in COVID-19 infections.

Oil markets were also buffeted by expectations of another interest rate hike in the United States, as the U.S. Federal Reserve tries to limit price rises in a tight labor market.

Market participants noted that trading volumes this week are expected to be lighter-than-usual as the end of the year approaches, creating more volatility in oil prices.

Wednesday's declines also follow three straight sessions of higher settlements on both crude benchmarks. Prices were at their highest in three weeks on Tuesday, as a cold snap across the U.S. forced shutdowns at major production sites and refineries at the weekend.

"We have seen a strong rebound over the last few weeks and that's being pared a little today but the narrative remains unchanged," said Craig Erlam, senior market analyst at OANDA.

"Next year brings immense uncertainty and plenty of potential upside risk for prices from the China reopening to lower Russian output and further OPEC+ cuts," Erlam said.

Russia said it aims to ban oil sales from Feb. 1 to countries that abide by a G7 price cap imposed on Dec. 5, although details of how the ban would work were unclear.

U.S. crude oil stocks were estimated to have fallen 1.6 million barrels last week with distillate inventories also seen down, a preliminary Reuters poll showed on Tuesday.

Industry group the American Petroleum Institute is due to release data at 4.30 p.m. EST [2130 GMT] on Wednesday. The U.S. government will release its figures at 10.30 a.m. on Thursday.