Oil dropped about $2 a barrel on Monday as a flare-up in COVID-19 cases in Beijing dented hopes of a Chinese demand rebound, while worries about more interest rate hikes to control rampant inflation added further pressure.

Beijing's most populous district Chaoyang announced three rounds of mass testing to quell a "ferocious" COVID-19 outbreak that emerged last week. Mass testing would take place until Wednesday. 

Brent crude was down $1.86, or 1.5%, to $120.15 at 0907 GMT, while U.S. West Texas Intermediate crude was down $2.15, or 1.8%, at $118.52.

"The present price fall is exacerbated by warnings of a 'ferocious' spread of the COVID virus in Beijing by officials, casting doubt on immediate demand recovery," said Tamas Varga of oil broker PVM.

Concern about further rate hikes, heightened by Friday's U.S. inflation data showing the U.S. consumer price index rose 8.6% last month, also pushed oil lower and weighed across financial markets.

The data put markets on alert that the Federal Reserve may tighten policy for too long and cause a sharp slowdown. The next Fed policy decision is on Wednesday.

Oil has surged in 2022 as Russia's invasion of Ukraine compounded supply concerns and as oil demand recovered from COVID lockdowns. Brent hit $139, the highest since 2008, in March, and both oil benchmarks rose more than 1% last week.

Supply remains tight, with OPEC and its allies unable to deliver in full on pledged output increases because of a lack of capacity in many producers, sanctions on Russia, and output in Libya roughly halved by unrest.

"The supply/demand dynamics remain supportive of prices," said Jeffery Halley of brokerage OANDA, who sees an extended oil sell-off as unlikely "unless U.S. markets move to price in a full-blown recession" and there are new lockdowns in China.

Reuters