Oil Drops 2% As U.S. Credit Rating Downgrade Obliterates Bullish Sentiment

Meanwhile, data suggests the Russian price caps are ineffective: File Image/Pixabay

Rating agency Fitch downgrading Washington's credit rating challenged the resiliency of oil traders'  bullish sentiment on Wednesday, and caused a 2 percent drop in the commodity – despite all-important demand being stronger than ever.

West Texas Intermediate settled down $1.88, or 2.3 percent, to $79.49 per barrel, while Brent settled down $1.71, or 2 percent, to $83.20 per barrel.

Fitch downgraded the U.S. to AA+ from AAA, citing fiscal deterioration over the next three years; earlier, Standard & Poor also stripped the U.S. of its triple-A rating.

Fitch stated, "There has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters, notwithstanding the June bipartisan agreement to suspend the debt limit until January 2025."

By contrast, news from the Energy Information Administration that U.S. crude stocks fell in the week by 17 million barrels, the largest drop in inventories according to records dating back to 1982 (due to increased refinery runs and strong crude exports), was completely ignored.

However, gasoline inventories rose by nearly 1.5 million barrels, while distillate stocks fell by 800,000 barrels.

Edward Moya, senior analyst for the Americas at Oanda, said of Wednesday's trading activity, "The macro backdrop is killing sentiment," and he added that "Also weighing on oil is a strong dollar that won't be going away anytime soon, as Treasury yields surge given the increased total of debt sales that will be coming from the Treasury."

Rebecca Babin, a senior energy trader at CIBC Private Wealth, said, "These [stock] draws are undeniably huge, but generally we lose some of the seasonal momentum from here.

"The macro risk trade is starting to rear its head again, so the market is not buying crude on this inventory data, but using it as a chance to sell crude as the next few months likely bring a moderation in growth."

In other oil related news on Wednesday, Argus Media Ltd data revealed the ineffectiveness of the recently imposed price cap on crude oil products from Russia.

Several refined oil products continue to trade above the capped price laid out by the G7, including diesel; additionally, the price of Russian ESPO crude blend has risen to an eight-month high and its discount versus Brent is the narrowest since the embargo went into effect, buoyed by strong demand from China and India.