Oil Flip-Flops as Traders Eye Fed Meeting

Oil prices seesawed in volatile trading on Tuesday, as investors eyed a U.S. Federal Reserve two-day policy meeting for any signal of a change in monetary policy.

The U.S. dollar remained under pressure on expectations that the Fed will keep monetary policy accommodative, helping support dollar-denominated oil prices that have benefited by attracting investment as a hedge against inflation.

Comments by the chief of Saudi Arabia's state-run firm Aramco voicing concern about the impact of high oil prices on the global economy weighed on crude early Tuesday, but the weak dollar helped oil recover.

The Saudi view contrasted with U.S. Treasury Secretary Timothy Geithner's remarks that oil, "at current levels, on its own, it won't put the recovery at risk."

A power outage that affected operations at several refiners in the Texas City, Texas, region near Houston lifted U.S. gasoline and heating oil futures and helped keep crude futures supported.

Brent crude for June edged up 5 cents to $123.71 a barrel by 1:07 p.m. EDT, having reached $124.40.

U.S. crude for June fell 52 cents to $111.76.

While Tuesday's intraday peak was $112.64, U.S. crude reached $113.48 on Monday, highest intraday price since September 2008, before ending the day down 1 penny.

Libya's civil war and violence-tinged unrest Syria and Yemen helped limit any oil price decline, keeping the potential for supply disruption in the region highlighted.

Tensions between Bahrain and Tehran escalated as Bahrain ordered the expulsion of an Iranian diplomat for alleged links to a spy ring in Kuwait.

Analysts and brokers said investors would be cautious awaiting the result of the Fed's Federal Open Market Committee meeting that started on Tuesday and will include a news conference on Wednesday.

"This week, it will be all about the Fed meeting. Volume and volatility will come back after the meeting," said Olivier Jakob of Petromatrix in Switzerland.

U.S. crude and Brent trading volumes were on pace to post higher totals than on Monday, but also remained on pace to continue to lag 30- and 250-day averages, according to Reuters data.

DOLLAR UNDER PRESSURE

The euro jumped to a 16-month high against the dollar, with no respite in sight for the greenback as long as the U.S. Federal Reserve continues to lag other major central banks in raising interest rates.

The dollar index measuring the greenback against a basket of currencies, weakened.

"Exchange rates and lack of confidence in the currency have been supportive to oil. The market is going to be cautious and wait to see if the Fed and (Chairman) Bernanke address rising energy prices and inflation," said Phil Flynn, analyst at PFGBest Research in Chicago.

U.S. OIL INVENTORIES

Oil investors also awaited weekly oil inventory reports expected to show crude stocks rose last week. A Reuters poll on Monday expected gasoline stocks to be lower, posting what would be a 10th consecutive weekly decline.

The forecast was for distillates to be up slightly, with refinery capacity utilization also rising.

Industry group the American Petroleum Institute (API) will issue its weekly inventory data at 4:30 p.m. EDT (2030 GMT) on Tuesday, with the government's report issued by the U.S. Energy Information Administration following on Wednesday at 10:30 a.m. EDT

(Additional reporting by Ikuko Kurahone in London and Manash Goswami and Florence Tan in Singapore; Editing by David Gregorio)