Oil steadies as supply concerns offset US ratings downgrade

By Alex Lawler

LONDON (Reuters) -Oil steadied on Thursday after dropping sharply from more than three-month highs in the previous session as concerns around supply tightness provided support, offsetting the hit to sentiment from a U.S. government credit downgrade.

Crude is being supported by supply concerns because of output cuts by OPEC+ – the Organization of the Petroleum Exporting Countries and allies – that are expected to be kept in place at a meeting on Friday, and further erode inventories.

Brent crude futures rose 2 cents to $83.22 a barrel by 1115 GMT, rebounding from an earlier decline. U.S. West Texas Intermediate crude dropped 9 cents, or 0.1%, to $79.40.

Both benchmarks hit their highest since April 17 on Wednesday, but closed down 2% after the ratings downgrade. Some analysts saw the drop as overdone.

“Oil stocks are still expected to plunge in coming months,” said Tamas Varga of oil broker PVM. “Yesterday’s dump bears all the hallmarks of an overreaction and order ought to be restored in the near future.”

On Wednesday, ratings agency Fitch downgraded the main U.S. credit rating, reflecting an expected fiscal deterioration as well as a high and growing government debt burden. The downgrade hit investor risk appetite, pushing oil and global stock markets lower.

“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.

Underlining tighter supply, U.S. crude inventories fell by 17 million barrels last week, the largest drop in U.S. crude inventories according to records dating back to 1982, the Energy Information Administration said on Wednesday.

The Bank of England raised interest rates to a 15-year high of 5.25% from 5% on Thursday, as inflation remains the highest of the world’s major economies. The decision in line with forecasts.