Oil steadied on Aug. 3 after dropping sharply from more than three-month highs in the previous session as concerns around supply tightness offset the impact on sentiment of a U.S. government credit downgrade.

Crude is supported by supply concerns because of output cuts by OPEC+ that a meeting on Aug. 4 is expected to keep in place, further eroding inventories.

Brent crude futures crept up 1 cent to $83.21 a barrel by 1222 GMT, recovering from an earlier decline. U.S. WTI crude edged $0.06 higher to $79.55.

Both benchmarks hit their highest since April 17 on Aug. 2, 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 over-reaction 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 MMbbl last week, the largest drop in U.S. crude inventories according to records dating back to 1982, the Energy Information Administration said on Aug. 2.

The Bank of England raised interest rates to a 15-year high of 5.25% from 5% on Aug. 3 as widely expected, to tame persistently high inflation.

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