Oil prices rise on U.S. inventory drop

Oil rose three per cent on Wednesday, boosted by data showing a drop in U.S. crude and gasoline stockpiles as the market weighed comments from the U.S. Federal Reserve

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Crude rallied early on news of lower throughput on a key import pipeline from Canada and a steeper than anticipated drop in U.S. crude stockpiles last week, according to data from the U.S. Energy Information Administration.

Oil markets then extended gains after the Fed pledged to keep interest rates low in view of a slower pace of economic recovery, before giving up those gains in post settlement trade as the dollar gained as market mulled comments from Chairman Ben Bernanke.

“The result of the low-interest rate policy continuing is a weaker environment for the dollar going forward … this sent the markets a signal for bulls to sow their oats a little,” said Phil Flynn, analyst at PFGBest Research in Chicago.

In London, ICE Brent crude for August delivery settled at $114.21 a barrel, gaining $3.26. Brent hit a session high of $114.48, just below its $114.52 100-day moving average, according to Reuters data, but fell down to $113.50 after the settlement.

U.S. August crude gained $1.24 to settle at $95.41 a barrel, dropping down to $94.54 in post-settlement activity. Brent’s premium against U.S. crude hit $18.80 after ending at $17.05 on Tuesday.

Trading volume in U.S. crude were light, at 30 per cent below the 30-day average while volume in Brent crude was off 4 per cent from the 30-day average.

Oil earlier found support from U.S. oil inventory data, which showed U.S. crude stockpiles fell 1.7 million barrels in the week to June 17 as refinery utilization jumped 3.1 per cent to 89.2 per cent of capacity, data from the U.S. Energy Information Administration showed.

Gasoline inventories fell by 464,000 barrels during the week as demand rose 0.9 per cent year on year.

“Gasoline looks constructive with reasonable demand for June and a larger than expected draw,” said Andy Lebow, broker at MF Global in New York.

The surprise fall in U.S. gasoline stocks pushed gasoline futures more than 3 per cent higher on the day.

Additional support came as TransCanada Corp said oil shipments on its Keystone pipeline, which carries oil from Alberta to Oklahoma, will be cut by 19.28 per cent as it works on the line following two oil spills in May.

U.S. ECONOMIC GROWTH AHEAD

In its policy statement, the Fed projected that the current spike in commodity prices would be temporary and expects U.S. economic growth to improve in the second half of this year.

However, it offered no clues on whether it there would be another round of quantitative easing.

“We do believe that growth is going to pick up going into 2012 but at a somewhat slower pace from what we had anticipated in April,” said Fed Chairman Ben Bernanke in a news conference hours after the Fed statement was issued.

“We don’t have a precise read on why this slower pace of growth is persisting,” he added.

U.S. oil prices are recovering from a four-month low of just above $91 hit on Monday, and analysts said a further strike towards $96 was possible, but much depends on the turnout of U.S. economic data due in the next two days.

On Thursday, markets will watch for data on jobless benefit claims and new home sales. More importantly, they will look for signs of how the broader economy is faring with the final estimate of the nation’s first quarter real GDP due on Friday.