Oil falls on concern about Federal Reserve direction

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Brent oil futures fell towards $104 per barrel on Tuesday, on concerns that the U.S. Federal Reserve might scale back its quantitative easing programme, which could damage fragile demand.

Comments by Fed officials and upbeat U.S. data last week fuelled speculation the central bank might start to reduce its bond purchases this year.

Investors are focusing on the release of minutes of the Fed's last meeting and testimony by Fed Chairman Ben Bernanke to Congress, both scheduled for Wednesday.

"The market is waiting to see what is going to happen with monetary policy and at what speed it will change," said Bjarne Schieldrop, head of commodity research at SEB in Oslo.

Front-month Brent futures fell 66 cents to $104.14 per barrel by 1034 GMT, after touching $105.31 in the previous session, the highest since May 7.

U.S. crude was down 42 cents to $96.29 but could gain support from inventory data due on Tuesday.

Analysts expect a drop of 400,000 barrels in U.S. crude stockpiles due to higher refinery activity and lower imports, according to a Reuters poll.

Lending some support to prices was fear that supply could be disrupted if fighting in the Middle East intensifies.

Reports that Lebanese Hezbollah guerrillas were involved in fierce fighting for Syria's embattled president prompted alarm the civil war may spread to neighbouring oil producers.

Initial estimates of Purchasing Managers' Indexes (PMIs) are due this week for China, the euro zone and the United States but are unlikely to dispel fears of a sluggish global economic outlook, Reuters polls show.

Highlighting these concerns, Swiss bank UBS trimmed its forecast for growth in China, the world's biggest energy consumer, citing weak credit expansion and credit growth.

"While some of the weakness may be transitory, increasingly evidence suggests that growth will be weaker than we previously envisaged," Tao Wang, UBS China economist, wrote in a report.

The spread between U.S. crude oil, also known as WTI, and Brent crude narrowed to its lowest in a week at $7.62 a barrel, and was heading for its lowest close since January 2011.

Analysts saw scope for further tightening in the spread due to an increased ability to move U.S. fuel to the Gulf and East coasts.

"Towards the end of the year there will be two new challenges to the Brent-WTI (spread)," Olivier Jakob, analyst at Petromatrix in Zug, Switzerland said.

"The first one will come from the increased pipeline capacity to the U.S. Gulf, the second one from the surge of terminal capacity for railcars in the U.S. East Coast." (Additional reporting by Ramya Venugopal in Chennai, India; editing by Jane Baird and Keiron Henderson)



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