Oil futures: Crude drops in wake of Fed announcement

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Crude futures dropped $1 in choppy trading Wednesday, after the Federal Reserve announced plans to boost the listless U.S. economy by purchasing longer-dated government debt.

Light, sweet crude for November delivery settled down $1, or 1.15%, at $85.92 on the New York Mercantile Exchange. Brent crude on the ICE Futures Europe exchange, which had been trading higher for most of the day, settled down 18 cents, or 0.16%, at $110.36 a barrel.

The Fed's policy-making panel said it would engage in another round of quantitative easing. The move, which the markets nicknamed "Operation Twist," involves buying $400 billion of long-dated Treasurys in an effort to make credit cheaper and spur spending and investing.

The dollar strengthened on the news, with the ICE Dollar Index, which tracks the greenback against a basket of other global currencies, rising 0.5% to 77.373. A stronger dollar can drive oil prices down, because it makes the dollar-denominated commodity more expensive for holders of other currencies.

Analysts are mixed on what long-term impact, if any, quantitative easing will have on crude prices. Some attribute run-ups in oil prices to prior Fed quantitative easing attempts, which pump more money into the economy. Others, however, say too many variables exist to precisely calculate the effect.

"It's very difficult to come up with any kind of objective measure on impacts," said Tim Evans, an analyst with Citi Futures Perspective. "To the extent we are living in an age of extremely low interest rates, this does stimulate investor appetite for risk. Some of that translates into the buying of oil market futures and options. Investors seeking more risk should be careful because they may succeed in finding it."

It was a volatile day for crude prices. The market opened the day down, then rose on news that oil inventories had dropped more than expected. They declined again ahead of the Fed announcement and continued to slide afterward.

Analysts said the late-day decline was probably attributable to the rise in the dollar and the downbeat message from the Fed, which noted "continuing weakness in overall labor market conditions" in its announcement.

"In a weak global economy like this, demand for oil is not going to be that great," said Matt Zeman, a market strategist at Kingsview Financial. "There's no reason for oil to be above $90, and it's probably at fair value right now. The fact the Fed did come out and take this action today has people nervous about the immediate-term outlook."

In other developments, the Energy Information Administration's oil inventory data for the week ended Sept. 16 showed crude stocks declined 7.3 million barrels, a far steeper drop than the 0.9 million barrels expected in a Dow Jones Newswires survey of 15 analysts. Meanwhile, gasoline stocks rose 3.3 million barrels, compared with the predicted 1 million barrels, and distillate stocks declined 0.9 million barrels after an increase of 1 million barrels was expected.

Front-month October reformulated gasoline blendstock, or RBOB, settled down 3.49 cents, or 1.3%, at $2.6665 a gallon. October heating oil rose 2.74 cents, or 0.9%, to $2.9342 a gallon.



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