Oil futures ended off highs in choppy trading on Wednesday after the U.S. Federal Reserve said the economy had lost some momentum but offered no new stimulus, with support still coming from data showing a bigger-than-expected drawdown in U.S. crude stockpiles last week.
The initial reaction to the Fed's statement following its two-day policy meeting was sharp as many investors had anticipated a much stronger stance from the Fed's policymakers. But with the European Central Bank still meeting on Thursday, investors were cautious in trimming positions, 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 signaled 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, after hitting a session high of $89.47. The advance followed a two-session loss, even though U.S. crude ended more than 3 percent higher for the month of July.
The U.S. Energy Information Administration (EIA) reported a 6.5 million barrel drop in domestic crude oil inventories last week, the largest weekly drop 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.
"The stock draws are large and providing some support to oil, but the big headline today is still to come, also from Washington, DC but from a different building as markets are waiting for the US Fed FOMC statement," said Olivier Jakob, analyst at Petromatrix in Zug, Switzerland.
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.
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 <LCOc1-LCOc2> has risen above $1.30 from just 88 cents a week ago and could widen further, analysts said.
Brent's premium against U.S. crude narrowed to below $17, after hitting $17.53 early. The premium hit $16.86 on Tuesday. <CL-LCO1=R>
The pace of trading picked up late, with Brent crude volume coming up at 13.5 percent below its 30-day average while U.S. crude was down 5.5 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.