Oil prices jumped as much as 5 percent on Wednesday as the dollar fell after the Federal Reserve indicated it preferred a more gradual path to normalizing U.S. interest rates despite being open to the first rate hike in almost a decade.
Benchmark Brent oil saw choppy moves earlier while U.S. crude prices fell after inventories in the United States hit record highs for a 10th week.
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The dollar's tumble on the Fed's latest policy statement changed the market's direction, however.
The Fed opened the door further for an interest rate hike as early as June, ending its pledge to be "patient" in normalizing monetary policy. But it also made it clear that it needs to see more gains in the labor market and price growth to raise rates.
The dollar fell against most major currencies after the statement. A weaker dollar raises the appeal of dollar-denominated commodities, including oil, for holders of other currencies.
Brent closed up $2.40, or 4.5 percent, at $55.91 a barrel. It had rallied more than $3 at one point, rebounding from an earlier drop of nearly $1.
U.S. crude settled up $1.20, or almost 3 percent, at $44.66 a barrel. It had fallen more than $1 in Wednesday's morning trade after the U.S. government said crude inventories rose 9.6 million barrels to a new record of 458.5 million barrels in the week ended March 13.
Brent has struggled to stay above the mid-$50 level while U.S. crude has tried to find ground at around mid-$45 since the end of January, when oil seemed to hit bottom from a seven-month selloff that knocked 60 percent off prices.
Some analysts remain pessimistic about the market's strength after Wednesday's rebound.
"We had been down about $10 over the last two weeks and the market was vulnerable to this kind of a turnaround, especially with the dollar weakening," said Gene McGillian, senior analyst at Tradition Energy in Stamford, Connecticut.
"But I don't see how when you have more than 9 million barrels coming out of the ground, and with a crude stockpile at nearly 460 million barrels, you can make a strong case for a continued rebound," he said, referring to the U.S. inventory data.
Refined oil products rallied too on Wednesday, keeping pace with the run-up in crude. New York-traded ultra-low sulfur diesel rose nearly 5 percent while gasoline gained 4 percent.
(By Barani Krishnan; Additional reporting by Himanshu Ojha in London and Keith Wallis and Jessica Jaganathan in Singapore; Editing by Dale Hudson, David Evans, Marguerita Choy and Andrew Hay)