Oil rises on Fed expectations

A driver pumps petrol into his car at a petrol station in Brussels March 8, 2011.

NEW YORK (Reuters) - Oil rose on Tuesday after steep losses in the previous session, as financial markets got a lift from hopes the U.S. Federal Reserve's policy panel could act to boost the economy.

Crude prices shook off some early weakness after the U.S. open, rising with U.S. stocks as Fed policy makers opened a two-day meeting.

The Federal Open Market Committee (FOMC) is expected to try to push long-term interest rates lower than they already are by tilting the U.S. central bank's portfolio toward longer-duration bonds, which could push some investors into riskier assets such as commodities.

The expectation helped counter concerns about the euro zone crisis, which have dragged on markets for more than a month and on Monday contributed to the $3 drop in Brent crude prices.

"I think the news overall for the last week has been somewhat negative for the price of oil, but I think we're getting a little bit of short covering as we get closer to Bernanke's final testimony tomorrow," Richard Ilczyszyn, senior market strategist for MF Global in Chicago.

Brent crude traded up $1.40 to settle at $110.54 a barrel, off early highs of $111.59. On Monday, Brent dropped more than $3 and touched a one-month intraday low of $108.87 a barrel.

The U.S. crude contract for October, which expired at the close, settled up $1.19 at $86.89 a barrel. The more heavily traded November contract gained $1.11 to settle at $86.92 a barrel.

Brent pared gains and U.S. crude briefly turned negative in early U.S. trade after the International Monetary Fund cut its growth forecast for the global economy and warned Europe and the United States could face another recession next year.

Crude prices have mostly held within a $7 range over the past month, with Brent trading between $108 and $115 a barrel and U.S. crude between $83 and $90, as markets weigh concerns about global demand growth, the euro zone crisis, and the return of Libyan exports.

Volumes were light, with Brent trade outpacing those for the U.S. contract. In late activity, U.S. volumes hit 439,000 contracts, down 38 percent from the 30-day average and 13,000 short of the Brent contract. Brent's volumes were 12 percent below the 30-day average, according to Reuters calculations.

BEARISH CONCERNS

Market players said the light volumes had helped increase volatility in recent days, and blamed it on concerns about the wide range of external factors currently impacting oil market trade, including the Greek crisis, the downgrade of Italy by Standard and Poor's and a potential downgrade of Spain.

"I think there is so much going on it is hard for anyone to commit to the market right now because of the unknown," said Ilczyszyn, adding trade could pick up after the FOMC meeting.

Signs of a slowdown in the economies of large oil consuming countries have also weighed on prices. U.S. gasoline demand fell 1.1 percent last week compared to a week ago, according to a report by MasterCard.

Investors in crude futures and energy equities scaled back their expectations of oil prices over the coming year, highlighting a deepening divide versus more bullish sell-side analysts on Wall Street, according to a survey of 148 long-only investors, hedge fund managers and industry experts by Berstein Research.

The survey forecast U.S. oil prices will average $90 a barrel over the next 12 months, down $8 from when the previous forecast released in the second quarter.

That contrasts with an average forecast for 2012 of $96.30 a barrel in Reuters' last oil price poll at the end of August, which primarily surveyed analyst teams at investment banks and major brokerage houses.

INVENTORIES

Data from the American Petroleum Institute released late Tuesday showed an unexpected build in U.S. crude oil inventories, compared with analyst expectations for a draw, in the week to September 16. Gasoline and distillate stockpiles rose slightly.

The market will now be watching out for the weekly report from the U.S. Energy Information Administration, due out at 10:30 a.m. on Wednesday.

(Reporting by Matthew Robinson and Robert Gibbons in New York; Ikuko Kurahone in London; Manash Goswami in Singapore; Editing by Bob Burgdorfer and Marguerita Choy)