| NEW YORK
NEW YORK Oil futures ended up but off its highs in choppy trading on Wednesday after the U.S. Federal Reserve said the economy had lost some momentum but offered no new stimulus that could shore up growth and translate into higher fuel demand.
Even as data showing a bigger-than expected drop in U.S. crude stockpiles last week added support, the initial downward reaction to the Fed's statement following its two-day policy meeting was sharp. Many investors had anticipated a much stronger stance from the Fed's policymakers, but with the European Central Bank meeting on Thursday, investors were cautious in trimming long positions too much, analysts said.
"Crude oil prices are adjusting as the Fed did not announce any new stimulus," said Dominick Chirichella, senior partner at Energy Management Institute in New York.
"Now investors will wait for the ECB meeting tomorrow and see what its president, Mario Draghi, will say," he added.
In its statement, the Fed said the U.S. economy has "decelerated somewhat," a change of tone from its assessment in June that the economy had been "expanding moderately.
While it offered no new monetary stimulus, the Fed signalled further bond buying ahead to keep the economic recovery going.
In London, Brent crude settled at $105.96 a barrel, gaining $1.04, after hitting a session high of $106.92. The day's gain followed two days of declines, although Brent ended July up more than 7 percent from June.
U.S. crude settled at $88.91, gaining 85 cents, having turned slightly negative after the Fed statement. Before that it had hit the day's high of $89.47. The advance followed two days of losses, even though U.S. crude ended more than 3 percent higher for the month of July.
It was like a "bungee cord phenomenon, as (U.S. crude) prices quickly dipped into negative territory only to be followed by a quick rebound," said Jim Ritterbusch, president of Ritterbusch & Associates in Galena, Illinois.
The U.S. Energy Information Administration (EIA) reported a 6.5 million barrel drop in domestic crude oil inventories last week, the largest weekly drawdown since December and far more than the 700,000 drawdown forecast in a Reuters poll. U.S. gasoline and distillate stockpiles also fell, going against the forecast for stock builds. <EIA/S>
Data showing that U.S. private employers added more jobs than expected in July was also supportive. The data comes ahead of Friday's all-important U.S. July non-farm payrolls and unemployment report.
U.S. employers probably hired 100,000 new workers last month while the unemployment rate was seen unchanged at 8.2 percent, according to a Reuters poll of analysts.
Ahead of the jobs report, investors will also weigh weekly U.S. jobless claims data due Thursday at 8:30 a.m. EDT (1230 GMT).
Brent has also been supported by news that maintenance work in the UK North Sea will cut output in September of grades which make up the Brent benchmark for international trade.
The prospect of lower output is already lifting the price of Brent for immediate delivery compared to those for later months. The spread between the Brent September and October contracts has risen to $1.27 from just 88 cents a week ago and could widen further, analysts said.
Brent's premium against U.S. crude narrowed to $17.05 at the close, after hitting $17.53 early. The premium hit $16.86 on Tuesday.
The pace of trading picked up late, with Brent crude volume coming up at 11 percent below its 30-day average while U.S. crude was down just 1 percent from its 30-day average, according to Reuters data.
Investors are also awaiting possible action from the European Central Bank on Thursday to defuse the region's debt crisis. As in the past, they are preparing for the risk of being disappointed.
Optimism rose last week after ECB President Mario Draghi said the central bank would do whatever it takes to save the euro.
In early trading, oil futures gained after data showed China's HSBC Purchasing Managers' Index rose to the highest level since February, easing concerns stoked by the official PMI figure that dropped to an eight-month low and fell short of expectations.
China's leaders had promised to step up policy "fine tuning" in the second half of this year to support the economy, according to the official Xinhua news agency on Tuesday.
(Additional reporting by Robert Gibbons in New York, Julia Payne in London and Luke Pachymuthu in Singapore; Editing by Richard Chang and Alden Bentley)