The new virus strain is up to 70% more transmissible than the original

Oil prices climbed to fresh March highs in the $52.50 area on Friday but failed to preserve the upside momentum and proceeded to a bearish correction at the start of the week amid widespread risk aversion.  

Brent crude dropped more than 3% since the start of the day, as a fast-spreading new coronavirus strain that has led to tighter restrictions in Europe fueled concerns over a slower recovery in fuel demand. Of note, according to the UK government, the new virus strain is up to 70% more transmissible than the original. As such, the latest developments overshadowed recent optimism stemming from the rollout of vaccines and a weekend deal among U.S. congressional leaders for a $900 billion coronavirus aid package.

Brent slipped to the $50.30 and could threaten the $50 handle if risk aversion intensifies any time soon. Furthermore, Friday’s Baker Hughes report showed that the number of active U.S. rigs drilling for oil rose by 5 to 263 last week, following increases in each of the last three weeks. This time, the figure was the highest since May.  

Also on the negative side, the USD index has switched into a recovery mode on Monday against the backdrop of a risk-off tone in the global financial markets. Meanwhile, Russian Deputy Prime Minister Alexander Novak said on Saturday that global oil demand was still between 6-7 million barrels per day below pre-crisis levels, adding to the downbeat tone in the market.  

If the market sentiment continues to deteriorate any time soon, Brent could dip below the $50 psychological handle in the short term. In this scenario, the futures could retarget the ascending 20-DMA, today at $49.26. Furthermore, oil could see a deeper correction this month is virus-related worries continue to spread across the globe, fueling demand-related concerns.

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