Oil settled sharply lower immediately after the Fed statement, which failed to pledge more concrete measures to get the economy back on track, disappointing traders. But prices turned positive as traders saw low rates as reason for hope.
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Industry data showing a shock 5.2 million barrel drop in U.S. crude oil inventories added impetus to oil's post-settlement rally, helping offset some of the economic gloom that pushed Brent as much as 15 percent lower in a week.
"The (Federal Reserve signaled) an extended period of diminished, if not negative, economic growth. This bodes poorly for demand, but may indicate additional easing measures, which we know from recent experience is supportive of asset prices, especially commodities," said John Kilduff, partner at Again Capital LLC in New York.
ICE Brent crude for September ended post-settlement trading up $1.76 at $105.50 a barrel. That was after it settled at $102.57, down $1.17, the lowest close since February 18.
Brent bounced as high as $105.95 after falling $5 to $98.74, the lowest intraday price since February 8.
U.S. September crude rallied to end post-settlement trading up 83 cents at $82.14 a barrel. It settled at $79.30, down $2.01, having reached $83.05 after falling to $75.71, the lowest since September 2010.
Oil prices had traded near parity prior to the Fed statement, having pulled out of deep losses after Wall Street stocks rebounded early in the day.
In a divided decision, the U.S. central bank also signaled that it was prepared to do more if necessary, noting that it still has tools available for spurring growth and will use them if necessary. But it made no commitment to purchase government debt in a third round of quantitative easing, or QE3.
U.S. stocks rallied late after seesawing in reaction to the Fed statement after a two-week slide by equities. The S&P 500 posted its best day in more than two years.
Amid the volatility, Brent's premium to U.S. crude jumped to $26.08, roaring past the previous record of $23.57 reached on July 14.
Trading volumes were strong, with Brent and U.S. crude trading more than 50 percent above their 30-day averages.
OPEC CUTS DEMAND GROWTH VIEW
Ahead of the Fed comments, OPEC and the U.S. Energy Information Administration cut demand growth forecasts for 2011 in separate monthly reports.
OPEC's expected oil demand growth increase for 2011 was lowered by 150,000 barrels per day (bpd) from the previous report to 1.21 million bpd, while the view for 2012 was lowered only marginally, by 20,000 bpd to 1.30 million bpd.
The EIA cut its 2011 demand growth forecast by 60,000 bpd but raised its 2012 forecast.
High prices helped push U.S. retail gasoline demand down last week versus the previous week and the year-ago period, MasterCard said in its report on Tuesday.
A weakening demand picture could bolster the view of Iran and other OPEC price hawks, who at a meeting in June blocked a Saudi Arabia-led proposal to increase output.
"What investors are worried about is what happens to the global economy and the currency markets. But consumption will certainly be affected should the U.S. go into recession again," said Bill O'Grady, chief investment strategist at Confluence Investment Management in St. Louis.
U.S. OIL INVENTORIES
U.S. crude oil stockpiles fell 5.2 million barrels last week, the industry group American Petroleum said late on Tuesday, against a forecast for stocks to be down.
Gasoline stocks fell 1.0 million barrels and distillate inventories fell 558,000 barrels, the API said.
U.S. crude stocks were estimated to be up 1.5 million barrels, according to a Reuters survey of analysts ahead of the API report.
Distillate stocks were expected to be up 1.1 million barrels and gasoline inventories up 500,000 barrels.
The government report from the EIA will follow on Wednesday at 10:30 a.m. EDT (1430 GMT).