BUSINESS

Oil rises sharply as Fed maintains stimulus program, US oil supplies drop

09/18/2013 05:39 EDT | Updated 11/18/2013 05:12 EST
NEW YORK, N.Y. - The price of oil spiked Wednesday as the Federal Reserve unexpectedly maintained its stimulus for the American economy and the U.S. Energy Department reported a bigger than expected drop in supplies of crude oil and gasoline.

Benchmark West Texas Intermediate crude for October delivery gained $2.65, or 2.5 per cent, to close at US$108.07 a barrel on the New York Mercantile Exchange. It was oil's biggest gain in three weeks and erased the losses from Monday and Tuesday.

The Fed was widely expected to begin winding down its program of buying $85 billion a month in bonds and other assets. Instead, the central bank said it will maintain the pace of the bond purchases because it thinks the economy still needs the support.

Global stocks and commodities have surged as the new money generated by the unconventional program has flowed through the financial system. Stocks rose sharply Wednesday following the Fed's announcement. The Standard & Poor's 500 index and the Dow Jones industrial average jumped to all-time highs.

Oil fell a combined $2.79 a barrel on the first two days of the week due to the prospect of a reduction in stimulus. But on Wednesday, even before the Fed issued its decision, traders appeared less fearful of the impact of so-called tapering, since analysts believed the central bank would keep official interest rates low to keep the U.S. economy chugging along.

In its announcement, the Fed repeated that it plans to keep its key short-term interest rate near zero at least until unemployment falls to 6.5 per cent from its current level of 7.3 per cent.

Earlier, the Energy Department said supplies of crude oil fell by 4.4 million barrels last week, almost three times more than analysts expected. At 355.6 million barrels, the U.S. supply of crude oil is 3.3 per cent below year-ago levels. Gasoline supplies dropped by 1.6 million barrels. Analysts had expected gasoline supplies to remain unchanged.

Brent crude, the benchmark for international crudes used by many U.S. refineries, was up $2.41, or 2.2 per cent, to US$110.60 a barrel on the ICE Futures exchange in London.

In other energy futures trading in New York: wholesale gasoline rose eight cents to US$2.74 a U.S. gallon (3.79 litres), heating oil rose four cents to US$3.04 a gallon and natural gas fell three cents to $3.71 per 1,000 cubic feet.

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