Oil gains on lower U.S. stockpile, all eyes on Fed

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Oil prices rose slightly on Wednesday following a drop in U.S. oil reserves, while investors looked to a meeting of the Federal Reserve later in the day for clues on the outlook for economic stimulus.

Fears that violence in Syria could draw in other Middle East countries also supported prices.

Brent futures for August delivery were up 34 cents to $106.36 a barrel by 1208 GMT, on track for their highest close since April 4.

U.S. crude for July delivery rose to a nine-month high of $99.01, before easing to $98.61, still up 17 cents.

In the United States, commercial crude oil stocks fell by around 4 million barrels last week, data from the American Petroleum Institute showed late on Tuesday.

That was more than the 500,000 barrel drop analysts had forecast in a Reuters poll. The U.S. Energy Information Administration releases its weekly data on Wednesday.

"We are underpinned by the drop in inventories, but it's all about the Fed today and what Bernanke says on the timing of the taper," Michael Hewson, a strategist at CMC Markets, said.

Global investors have been on edge since Fed Chairman Ben Bernanke suggested the U.S. central bank could consider rolling back monetary stimulus, and a statement at the end of the policy meeting on Wednesday may provide a timeline.

Federal Reserve policymakers are likely to announce, however, that they will continue buying bonds at a monthly pace of $85 billion, while keeping options open to scale back later this year if the U.S. labour market continues to improve.

"Bernanke will try to hand-hold the market and manage expectations, but the outlook for easing will depend on data, so we'll have volatility for the rest of the summer," Hewson said.

Analysts expect the Fed to start tapering off its bond-buying programme in the second half of this year, a Reuters poll showed.

Oil reached an 11-week high earlier this week, buoyed by fears of supply disruption if other Middle Eastern nations are drawn into the conflict in Syria, where heavy fighting was reported on Tuesday in Aleppo, its biggest city.

An international peace conference on the country is unlikely to be held before August due to differences between Russia and the West, a source at a meeting of the Group of Eight leaders said.

"Unless there is a significant increase in the likelihood that other oil-producing countries in the region will be drawn into the conflict, rallies on news flow surrounding this issue will fade," Marc Ground, an analyst at Standard Bank, said in a note.

Investors expected demand for fuel to pick up in the second half of the year as the global economy improves after a slow start in the first half.

U.S. crude futures were supported by improving economic data and further gains in equities but still faced resistance at $100 a barrel, ANZ analysts said in a note. (Additional reporting by Florence Tan and Jessica Jaganathan in Singapore; editing by James Jukwey and Jane Baird)



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