* U.S. crude stocks at lowest since March 2012 -EIA
* Big western Libya oilfield ramps up production
* Easing tensions over Syria reduce risk premium to oil (New throughout, updates prices and market activity to settlement, with details on Fed decision)
By Jeanine Prezioso
NEW YORK, Sept 18 (Reuters) - Crude oil futures settled sharply higher on Wednesday, surging late in the session after the U.S. Federal Reserve said it would leave its monetary stimulus program unchanged, a policy largely seen as supporting commodity prices.
Both Brent and U.S. oil posted their largest daily gains in three weeks. The Fed said it would keep purchasing $85 billion in bonds per month, surprising investors who had expected the Fed to begin tapering, or reducing, its stimulus.
But policy makers on the Federal Open Market Committee (FOMC) said they worried economic recovery would slow if the U.S. central bank let up on fiscal stimulus.
“The FOMC’s decision not to taper reflects the recent slowing in the economy, the lackluster employment gains, and the concerns over deflation,” said John Kilduff, partner at Again Capital in New York. “Monetary support for assets, especially dollar-denominated commodities, will continue.”
Brent oil for November delivery settled $2.41 per barrel higher at $110.60. The previous session, Brent settled at a six-week low.
U.S. crude for October delivery settled $2.65 per barrel higher, or 2.51 percent, at $108.07 a barrel after trading as high as $108.25. U.S. oil touched both the 10-day moving average of $108.03 and the 15-day moving average of $108.17.
After settlement, U.S. crude extended gains above $3 per barrel to a high of $108.49.
Both contracts settled with their biggest daily percentage gains since Aug. 27. U.S. oil’s discount to global benchmark Brent narrowed to its smallest point in a month.
Earlier in the session, oil had rallied after data showed U.S. crude oil inventories fell to their lowest level since March 2012. Supplies at the Cushing, Oklahoma, storage hub fell to their lowest level in 19 months.
“That was a noticeable drop,” said Michael Lynch, an oil analyst and president of consultancy Strategic Energy & Economic Research Inc in Winchester, Massachusetts.
U.S. stock indices hit record intraday highs after the Fed made its announcement. The U.S. dollar weakened, making dollar-denominated commodities less expensive for investors holding other currencies.
Gasoline and heating oil futures also rose in tandem with crude oil, coming off steep declines the previous session.
U.S. gasoline futures gained nearly 3 percent on the day to settle at $2.74 per gallon, after settling at a nine-month low on Tuesday. Heating oil futures ended the day 1.7 percent higher at $3.04 per gallon after their largest one-day percentage loss in three months in the previous session.
U.S. crude’s discount to Brent CL-LCO1=R narrowed to $2.64 per barrel, its smallest since Aug. 16. It settled at $3.32.
The spread has narrowed $4 since the start of the month, in part due to easing geopolitical worries, as well as the increased ability of new pipeline capacity to ease a glut of U.S. crude at the Cushing, Oklahoma delivery point.
Traders have been watching about the rapid drawdown at Cushing due to concerns about the availability of specific light, sweet crudes which can be delivered against the contract. The front-month October contract expires on Friday.
U.S. government data showed stockpiles at the hub fell by 16.4 million barrels over the last 11 weeks to the lowest level in 19 months.
Brent oil prices were still supported by supply disruptions in Libya. Libya’s crude oil production has recovered to nearly 40 percent of its pre-war capacity but output has risen to only 620,000 barrels per day (bpd) compared with a pre-war level of 1.6 million bpd.
Still, analysts said higher North Sea supplies in October and more exports from Angola in November should pressure prices.
Oil had also been pressured this week after world powers held talks to eliminate Syria’s chemical weapons without the need for military action. This eased concerns that oil supply from the Middle East would be at risk. (Additional reporting by Robert Gibbons in New York, Peg Mackey in London and Jessica Jaganathan in Singapore; Editing by William Hardy, Marguerita Choy and David Gregorio)