MELBOURNE: Oil rose in early trade on Tuesday, paring sharp overnight losses, as the latest tropical storm in the Gulf of Mexico lost strength, but worries about fuel demand persisted with flare-ups around the globe in coronavirus cases.

U.S. West Texas Intermediate (WTI) crude futures for October, due to expire on Tuesday, rose 26 cents, or 0.7%, to $39.57 a barrel at 0224 GMT. The more active November contract rose 15 cents, or 0.4%, to $39.69.

Brent crude futures rose 13 cents, or 0.3%, to $41.57 a barrel.

Crude prices started to recover as Texas refineries stayed open despite forecasts of heavy flooding, with Tropical Storm Beta expected to keep losing strength, allaying worries about U.S. refinery demand for feedstock.

Both oil benchmarks fell around 4% on Monday, hit by rising concerns that an increase in coronavirus cases in major markets could spur fresh lockdowns and hurt demand. That raised the possibility that Libyan oil could return when it isn't needed.

"We had a pretty punchy risk-off session (overnight) ... on fears around the risk that a COVID resurgence starts to have negative impacts on demand again," said Lachlan Shaw, National Australia Bank's head of commodity research.

Markets are nervous about demand in places like the United Kingdom, where fresh restrictions are being imposed. U.S. health officials are also warning of a new wave in the coming winter. 

"When the virus resurges, governments lock down, impose restrictions, and individuals and businesses start to retreat. It's all bad for demand," Shaw said.

Traders will be watching out for the American Petroleum Institute's data on U.S. oil inventories due later on Tuesday. 

U.S. crude oil and gasoline stockpiles likely fell last week, while inventories of distillates, including diesel, were seen climbing, a preliminary Reuters poll showed. 

 

(Reporting by Sonali Paul; Editing by Tom Hogue) ((Sonali.Paul@thomsonreuters.com; +61 407 119 523))