Oil slips below $88 as Fed tempers growth hopes

Oil slips below $88 as Fed tempers growth hopes

London: Oil prices fell below $88 on Wednesday after the US Federal Reserve dampened expectations of rapid economic recovery and following inventory data suggesting weak demand in the world’s largest oil consumer.

“The Fed outlook was less optimistic than some might have expected after recent positive economic data and the American Petroleum Institute (API) inventory report was quite bearish for prices," said Carsten Fritsch, an analyst at Commerzbank. The Fed on Tuesday offered only a cautious nod to the economy’s improving prospects as it put a spotlight on high unemployment and reaffirmed its commitment to buy $600 billion in bonds.

The sober assessment stood in contrast to increasingly optimistic forecasts on Wall Street, where analysts have been bullishly revising economic projections based on a slew of stronger-than-expected data and a new government tax cut plan.

Inventory data from the API released late on Tuesday showed US crude stocks fell 1.4 million barrels in the week to 10 December, less than the 2.5 million forecast in a Reuters survey of analysts. Distillate supplies rose 2 million barrels.

US light crude oil futures for January shed 70 cents to $87.58 a barrel by 3:12pm, and ICE Brent dropped 45 cents to $90.76.


The US Energy Information Administration (EIA) report is due at 9:00pm. Readings from the US on consumer price inflation and manufacturing statistics will also be released on Wednesday.

Fritsch at Commerzbank said the market would be waiting to see whether the EIA figures confirmed the trend shown by the industry data from the API. Crude prices were also pressured by the dollar, which rose 0.45% against a basket of major currencies.

A stronger dollar can pressure dollar-denominated oil prices as it makes fuel more expensive to holders of other currencies.

A stronger dollar can also push investment into foreign exchange markets and out of from commodities.

In a note to clients, MF Global said the slew of data had not changed its outlook for the energy markets, which it continued to expect would experience a sharp correction over the next few weeks.

Bearish sentiment has been limited by the very cold weather in the United States and Europe, which is expected to continue through the week, and has increased heating fuel demand.