Oil steady after drop on U.S. downgrade as supply concerns support

By Andrew Hayley and Sudarshan Varadhan

SINGAPORE (Reuters) -Oil prices were little changed on Thursday after a two-day decline, including a sharp drop on Wednesday, as the U.S. government’s credit downgrade weighed on sentiment, though concerns around supply tightness provided some support.

Ratings agency Fitch downgraded the long-term foreign currency ratings of the U.S., the world’s biggest oil consumer, reflecting expected fiscal deterioration, political polarisation and the international status of the U.S. dollar.

Despite the broader bearish sentiment, prices are being supported by concerns of tightening supply because of output cuts by major producers that are expected to be kept in place in a meeting on Friday.

futures were at $83.24 a barrel, up 4 cents or 0.1%, at 0422 GMT, while U.S. West Texas Intermediate crude was at $79.53 a barrel, up 0.1%.

Both benchmarks were trading near their highest since April on Wednesday, but closed down 2% after the ratings downgrade. WTI prices rose nearly 16% in July while Brent gained more than 14%.

“Since oil had a steady rise over the past month, it was ripe for a pullback. The oil market will remain tight over the short-term, but prices could be still vulnerable for a deeper drop,” said Edward Moya, an analyst at OANDA.

The supply situation was highlight by a record 17 million barrel drop in stockpiles last week as refiners stepped up runs and exports topped 5 million barrels per day (bpd), according to data from the Energy Information Administration on Wednesday.

The inventory drawdown, which dramatically exceeded analysts’ expectations in a Reuters poll of 1.4 million barrels, pointed to global demand outpacing supply as deep cuts from major producers continue.

The next market monitoring committee meeting of the Organization of the Petroleum Exporting Countries and allies, together called OPEC+, is to be held on Aug. 4.

Reuters reporting suggests that OPEC+ is unlikely to tweak its current oil output policy, with Saudi Arabia expected to extend their voluntary 1 million bpd cut for another month to include September.

Government policies to boost the economy of China, the world’s second-biggest oil consumer, are also giving some support for prices and fuel demand. The world’s second-largest economy also reported on Thursday its services sector expanded at a quicker pace in June, offsetting disappointing manufacturing data earlier this week.

“China’s further stimulus policy and a sharp draw in the U.S. inventory data may still be the strong fundamental reasons for a rebounding crude market,” said Tina Teng, an analyst at CMC Markets.

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