Brent hovers below $111 before Fed, economy weighs

LONDON: Brent crude oil hovered just below $111 a barrel on Wednesday, pressured by uncertainty over the outcome of the Federal Reserve meeting and concern about the euro zone debt crisis.

A surprise increase in US crude inventories reported on Tuesday by the American Petroleum Institute also weighed on the market. Investors are awaiting the US government's report at 1430 GMT for confirmation of the movement in stocks.

Brent crude was up 2 cents to $110.56 a barrel at 1252 GMT, after slipping as low as $110.02 earlier in the session. US crude fell 81 cents to $86.11.

The Fed is expected to announce plans to intervene in the bond market to push long-term interest rates, already near historic lows, even lower.

"They'll do the minimum the market expects, but it will be hard for them to do more, and the effect on the economy is questionable, as I see it little more than an accounting trick," said Michael Hewson, analyst at CMC markets.

Brent crude has been supported by supply disruptions in the North Sea, source of the crude which underpins the futures contract, and the lack of Libyan shipments due to the conflict there.

Shipments of North Sea Forties crude are likely to be further delayed following lower-than-expected production at Nexen's Buzzard oilfield, trading sources said on Wednesday.

Still, the prospect of Libya resuming output and an increasingly bleak economic outlook has kept many analysts bearish on the longer-term prospects for oil prices.

"There's set to be weaker growth as shown by the IMF, which points to lower oil demand and production in Libya is coming on stream faster than expected," Christophe Barret, analyst at Credit Agricole Corporate & Investment Bank said.

The International Monetary Fund on Tuesday sounded the latest warning about growth, saying the United States and Europe could slip back into recession, a factor that weighed on oil prices earlier in the day.

Barret said a decision by the Fed to stock up on longer-term Treasury notes as expected, may initially be supportive of crude prices, but that it would have negligible longer term impact.

"What matters is the supply-demand balance, slow growth matters more than monetary easing."

US SUPPLIES

Before the Fed statement, the spotlight will fall on the US Energy Information Administration's supply report at 1430 GMT. Analysts expect a 700,000-barrel decline in crude stocks.

Hewson at CMC Markets said the technical outlook was rather bearish for oil too, and that disappointment from the Fed or from the EIA data could provoke a slip below recent support levels.

"Charts are suggesting a diminution of buyers and we could see a break below $108 for Brent and below $85 for WTI (US crude), he said, adding that the next significant support for Brent was at around $105 per barrel.

But producers may intensify efforts to curb output if Brent falls towards $100 a barrel, JP Morgan said in a report, because many Middle East crude exporters may have to spend heavily on social programmes to prevent public upheaval.

"Ongoing strife in the Middle East reminds us that while the conflict in Libya is drawing to a close, the regional protests for government reform have not gone away," the bank said.

Copyright Reuters, 2011