Oil holds near 6-month high after Fed, U.S. fuel draw

NEW YORK Wed Nov 3, 2010 4:59pm EDT

NEW YORK (Reuters) - Oil rose on Wednesday, closing slightly off a six-month high after the U.S. Federal Reserve met market expectations with a plan to buy U.S. government debt to boost the economy.

The U.S. central bank said it would buy around $75 billion in Treasury bonds per month through mid-2011, totaling around $600 billion. After the announcement, oil rose slightly and the dollar weakened. .DXY.

Oil briefly hit a six-month high in early trade as investors anticipated the Fed announcement. Data showing U.S. fuel inventories fell last week also buoyed prices.

U.S. crude for December delivery settled up 79 cents at $84.69 a barrel, its highest closing price since May 3. Crude reached a six-month intraday high of $85.36 in morning trade.

ICE December Brent settled up 97 cents at $86.38.

"The market has been very optimistic about this and the Fed isn't exceeding expectations sufficiently to prompt another round of commodity inflation," said Joseph Arsenio of Arsenio Capital Management in Larkspur, California.

Weekly data showed U.S. stocks of gasoline and distillate fuels fell more than expected last week as the country's refineries cut utilization rates to the lowest since March, according to the Energy Information Administration.

Wide anticipation of the Fed stimulus measures -- meant to avert deflation and create jobs by easing long-term borrowing costs -- have already boosted commodities prices and weakened the dollar over the last few months.

The Fed's plans are in line with consensus expectations, but are less aggressive than some polled by Reuters had anticipated. Estimates for overall Fed asset purchases ranged from $250 billion to $2 trillion.

A weaker dollar can make commodities -- mostly priced in dollars -- more attractive to investors. More borrowing spurred by Fed easing could expand the pool of dollars flowing into commodities markets.

"The market is volatile, but the package was bigger than expected so that has pressured the dollar and lifted commodities," said Richard Ilczyszyn of Lind-Waldock in Chicago.

U.S. ECONOMIC DATA IMPROVE

Following the Fed's announcement, commodities investors may return to closer scrutiny of the fundamentals of oil supply and demand and broad economic indicators, analysts said.

"More important to the oil market now is demand, which is effectively stagnant in the United States, according to the most recent (EIA) report," said Arsenio.

More evidence about the state of the U.S. economy, which would affect future demand, will arrive on Thursday, with weekly jobless claims data, and Friday, with monthly payrolls data and the unemployment rate from the Labor Department.

Although fuel stocks fell, U.S. crude stockpiles rose by 2 million barrels last week, EIA figures showed, leaving a major U.S. crude surplus compared to the same period of 2009.

Total U.S. oil product demand fell week-on-week by 156,000 barrels to 19.3 million barrels, although a fall in refinery utilization, to 81.8 percent, helped draw down distillate stocks by 3.6 million barrels and gasoline stocks by 2.7 million barrels last week.

The U.S. services sector grew more quickly than expected in October and factory orders posted their largest gain in eight months. Also, a private report showed U.S. private employers added more jobs than expected in October.

(Additional reporting by Gene Ramos, Robert Gibbons, Eileen Moustakis and Edward McAllister in New York, Zaida Espana in London, and Alejandro Barbajosa in Singapore; Editing by David Gregorio)

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