Oil retreats after two-day rally on supply issues

SINGAPORE: Oil prices fell on Wednesday, taking a breather after a strong rally this week spurred by the loss of a quarter of Mexico's production and signs that China, the world's biggest importer, has curbed a recent coronavirus outbreak.

Brent crude futures dropped 25 cents, or 0.4%, to $70.80 a barrel by 0525 GMT, while US West Texas Intermediate (WTI) crude futures fell 28 cents, or 0.4%, to $67.26.

Both benchmark contracts rose by about 8% over the previous two days, erasing most of the slump from a seven-day losing streak.

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"A second consecutive day of price rally in the crude market had also spurred some profit-taking, while American Petroleum Institute data showing a less-than-expected decline in US oil inventories last week added to the downward pressure," Vandana Hari said in a note to clients.

Prices rallied following a more than 400,000 barrels per day drop in supply in Mexico after a fire on an oil platform, but the state oil firm said it expects to resume production by Aug. 30.

"Brent crude should remain fairly supported here despite today's weakness as the oil market is still heavily in deficit and that won't change anytime soon," Edward Moya, senior market analyst at OANDA told Reuters.

American Petroleum Institute data showed crude inventories fell 1.6 million barrels for the week ended Aug. 20, while gasoline stockpiles fell 1 million barrels, according to sources, who spoke on condition of anonymity.

Analysts were expecting crude stockpiles to fall by 2.7 million barrel and gasoline stocks to drop by 1.6 million barrels, according to a Reuters poll.

Official data from the US Energy Information Administration is due to be released on Wednesday at 1430 GMT.

Last week's losses were driven by fears that the spread of the highly contagious Delta variant of the coronavirus in Asia would slow the region's economic recovery.

"Oil has benefited from easing delta variant concerns with the world's two largest economies, the US and China, but that is not necessarily the case in Sydney and Japan," said Moya.

In a promising sign that the spread of Delta infections was easing in China, the country on Wednesday reported just 20 new confirmed coronavirus cases for Aug. 24, down from 35 a day earlier.

ANZ commodity analysts pointed to a pick-up in traffic in Beijing and Shanghai as evidence of the Delta variant being "stamped out".

"Nevertheless, improvements in the airline industry may lag amid some ongoing restrictions," ANZ Research said in a note, adding that the loss of Mexican supply is equal to planned output increases in August from the Organization of the Petroleum Exporting Countries and its allies.