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UPDATE 7-Oil drops 5% on weak demand outlook and higher OPEC supplies

* Rising COVID-19 cases dampen demand outlook

* OPEC output rises 160,000 bpd in Sept -Reuters survey

* Libya’s oil output rises to 270,000 barrels per day -source

* U.S. fiscal stimulus talks make headway (New throughout, updates prices, market activity and comments)

By Devika Krishna Kumar

NEW YORK, Oct 1 (Reuters) - Oil prices fell more than 5% on Thursday as rising coronavirus cases around the world dampened the demand outlook, and a rise in OPEC output last month also pressured prices.

Brent crude futures fell $1.90, or 4.5%, to $40.40 a barrel by 12:34 p.m. ET (1634 GMT). U.S. West Texas Intermediate (WTI) crude futures were down $2.09, or 5.2%, at $38.13 after sliding to a session low of $37.61. “It has become evident that the virus has not been contained. Infection rates are going up, the global death toll has surpassed the 1 million mark and the world is becoming a gloomy place once again,” said PVM Oil analyst Tamas Varga.

In the United States alone the pandemic has infected more than 7.2 million and killed more than 206,000.

Europe’s worst COVID-19 hotspot Madrid will go into lockdown in coming days and Moscow’s mayor ordered employers to send at least 30% of their staff home, as several European countries reported records in new infections.

Standard Chartered analysts said they now expect global demand to fall 9.03 million bpd in 2020 and recover by 5.57 million bpd in 2021, leaving the 2021 average slightly below the 2016 average.

“Today’s trade is sending off some strong bearish vibes given the selloff across the energy complex that is developing despite a significant lift in risk appetite and weakening U.S. dollar,” said Jim Ritterbusch, president of Ritterbusch and Associates.

“Additionally, Iranian output is reportedly on the upswing in providing a potential challenge to OPEC quota adherence”

Increasing oil supply from the Organization of the Petroleum Exporting Countries (OPEC) also weighed on the market, with output in September up 160,000 barrels per day (bpd) from August, a Reuters survey found.

The rise was largely on the back of higher supplies from Libya and Iran, both exempt from an oil supply pact between OPEC and allies led by Russia, a grouping known as OPEC+.

Libya’s oil output has risen to 270,000 barrels per day as the OPEC member ramps up export activity following the easing of a blockade by eastern forces, a Libyan oil source told Reuters on Thursday.

“Increasing supplies from OPEC+ will be risking the rebalancing effort as the market is still grappling with weak demand,” ANZ Research said.

Earlier in the session, prices received some respite from progress in U.S. talks on a stimulus package for the world’s biggest economy.

U.S. President Donald Trump’s administration has proposed a new stimulus package worth more than $1.5 trillion. Earlier, U.S. Treasury Secretary Steven Mnuchin said talks with House Speaker Nancy Pelosi made progress on COVID-19 relief legislation, and the House of Representatives postponed a vote on a $2.2 trillion Democratic coronavirus plan to allow more time to agree a bipartisan deal.

In Norway, a labor union said it would escalate offshore industrial action to four additional fields from Oct. 4 after dozens of workers went on strike at the 470,000 bpd Johan Sverdrup oilfield.

Sverdrup operator Equinor said it could maintain safe operations at the oilfield despite the strike. (Additional reporting by Ahmad Ghaddar in London, Sonali Paul in Melbourne and Seng Li Peng in Singapore Editing by David Goodman, Jane Merriman and David Gregorio)

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