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Oil slips as US ratings downgrade offsets supply concerns

Oil slips as US ratings downgrade offsets supply concerns
© Reuters. FILE PHOTO: A oil pump is seen at sunset outside Scheibenhard, near Strasbourg, France, October 6, 2017. REUTERS/Christian Hartmann/File Photo

By Alex Lawler

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

Ratings agency Fitch on Wednesday 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.

futures were down 81 cents, or 1%, at $82.39 a barrel at 0812 GMT, while U.S. West Texas Intermediate crude dropped 73 cents, or 0.9%, to $78.76l.

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.”

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

Underlining tighter supply, 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.

Before the OPEC+ meeting, the Bank of England is expected to raise 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 is due at 1100 GMT.

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