Oil Drops Sharply on U.S. Credit Rating Downgrade

Oil prices fell sharply on Thursday, extending losses from the previous session after Fitch downgraded the U.S. credit rating, denting risk appetite. However, supply concerns provided some support and limited losses.  

Brent crude futures fell 1% to $82.39 a barrel while U.S. West Texas Intermediate crude dropped 0.9% to $78.76 a barrel. Both benchmarks had hit their highest since April on Wednesday but then closed down 2%.

Fitch's downgrade of the U.S. rating reflected expectations of higher government debt burdens and political polarization. The move spooked financial markets, sending oil and stock prices lower. 

However, oil's downturn was seen as overdone by some analysts given expectations of tightening supply. OPEC+ is expected to keep production cuts in place at its meeting on Friday, while U.S. crude inventories fell by 17 million barrels last week - the largest drop on record.    

Factors like OPEC+output restraint and declining U.S. crude stockpiles are providing support to prices and preventing steeper declines. Analyst Edward Moya said the oil market will remain tight in the short term but prices could be still vulnerable to a deeper drop.

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