Oil prices extend their losses on Thursday after falling about 2 per cent the previous day amid concerns over the US credit rating downgrade and a strong dollar.
Brent, the benchmark for two thirds of the world’s oil, was trading 0.17 per cent lower at $83.06 a barrel at 3.57pm UAE time, while West Texas Intermediate, the gauge that tracks US crude, was down 0.13 per cent at $79.39 per barrel.
On Wednesday, Brent settled 2.01 per cent lower at $83.20 a barrel while WTI was down 2.31 per cent at $79.49.
On Tuesday, rating agency Fitch downgraded the US's long-term foreign currency ratings to “AA+” from “AAA”, citing fiscal deterioration over the next three years, growing general government debt, and the “erosion of governance” that has resulted in repeated debt limit standoffs and last-minute resolutions.
The downgrade “should not have been a surprise for investors that have been following Fitch’s comments, but the timing surely caught everyone off guard”, Edward Moya, senior market analyst at Oanda, said.
Futures were supported by a record drop in US crude stocks.
US crude inventories, an indicator of fuel demand, fell by 17 million barrels to 439.8 million barrels last week, the lowest levels since 1985, according to the US Energy Information Administration.
Analysts polled by Reuters were expecting an inventory drawdown of 1.4 million barrels.
Meanwhile, petroleum stocks fell by 1.5 million barrels in the week that ended on July 28, while distillate inventories decreased by 800,000 barrels.
“A strong dollar is getting in oil’s way, but that should only lead to limited downside given how good both the supply and demand fundamentals have become,” Mr Moya said.
The US Dollar Index – a measure of its value against a weighted basket of major currencies – has gained 1 per cent over the past five days. It was marginally up at 102.66 on Thursday.
A stronger greenback makes dollar-denominated oil more expensive for holders of other currencies.
Despite the recent sharp rise in crude prices, BMI, a unit of Fitch Solutions, has held its view of $80 Brent for 2023. It expects prices to rise to $83 a barrel next year.
“As anticipated, oil prices have strengthened heading into the third quarter, supported by seasonally higher demand, unilateral cutbacks by Saudi Arabia and weakening Russian exports,” BMI said in a research note on Wednesday.
“Global economic activity is slowing, and we expect to see short and shallow recessions in both the eurozone and the US, which will erode physical oil demand and weigh on sentiment,” the research firm said.
“However, the slowdown has been widely anticipated and should, by now, have largely been priced into Brent.”
Last week, the International Monetary Fund marginally raised its forecast for the global economy for this year and the next but said it was “not out of the woods” due to headwinds that persist, even though the recovery is on track.
The fund revised its earlier forecast for this year upwards, raising it by 0.2 percentage points to 3 per cent, although lower than the 3.5 per cent expansion recorded in 2022. It is projecting a similar pace of growth in 2024.
The Opec+ alliance of 23-oil producing countries is unlikely to make any changes to its output policy when it meets on August 4.
At the June 4 meeting, the group agreed to keep its current production curbs, totalling 3.66 million barrels per day, in place until the end of 2024.
Saudi Arabia, which announced the extension of its unilateral production cut of 1 million bpd until August on July 3, is expected to maintain the output cut through September, according to Goldman Sachs.
"After a remarkable run in July, oil’s rally has taken a pause this week on a risk-off tone as Fitch stripped the US of its AAA sovereign credit rating, spurring the US dollar higher," Japanese bank MUFG said in a research note on Thursday.
"Beyond the headwind that elevated oil prices are causing global central banks, diesel – the workhorse of the global economy – is witnessing a rare summertime price rally as refinery outages and heatwaves are curbing supply."
MUFG said that a "deeper" deficit than the 1.3 million bpd estimated by the lender would be required to drive higher oil prices.
"While China’s performance leaves plenty of room for improvement, we note that the country’s oil inventories are approaching all-time highs, and are likely to be drawn down should demand outperform," the bank said.
