WTI drops nearly 6% as US-China tension weigh on stocks

Oil is flashing red on Friday amid risk aversion in the Asian equity markets. 

West Texas Intermediate's (WTI) front-month contract is trading near $31.80 at press time, representing a 6.3% drop on the day. Meanwhile, Japan's Nikkei index is down 0.55% and Hong Kong's Hang Seng is reporting a 4% decline. Other major indices are also facing selling pressure. 

Investors are shunning risk, possibly due to fears that China's decision to impose a national security law on the Hong Kong city would lead to an escalation of tensions between the US and China. 

The two nations are already butting heads over the origin of coronavirus and China's handling of the outbreak. Also, the US proposal of arms sale to Taiwan has not gone down well with Beijing, which doesn't recognize Taiwan as an independent nation. China's Premier Li was out on the wires early Friday, asserting that his government will resolutely oppose and deter any separatist activities seeking Taiwan independence. 

The geopolitical tensions and the resulting risk-off tone in the Asian equities may have caused some oil traders to take profits on long positions. The black gold rose to a two-month high of $34.66 on Thursday. At that level, prices were up nearly 250% from the lows near $10 observed last month. 

The sell-off in oil may stall if the risk sentiment stabilizes. In fact, a recovery cannot be ruled out as fuel demand is recovering with countries easing business and social restrictions imposed to counter the coronavirus pandemic.

Technical levels