09/20/2011 02:18 EDT | Updated 11/20/2011 05:12 EST

Oil rises ahead of Fed meeting, as investors expect further US gov't stimulus

NEW YORK, N.Y. - Oil climbed above US$86 per barrel Tuesday on expectations that the Fed will announce new measures to stimulate the U.S. economy.

Benchmark crude rose 81 cents to $86.62 per barrel in early afternoon trading in New York. Brent crude, which is used to price oil produced in foreign countries, increased $1.18 to $110.32 in London.

The Federal Reserve starts a two-day meeting on Tuesday. The Fed has pumped money into the economy before by buying billions of dollars in bonds, and that influx of cash helped boost oil and gasoline last fall.

Fed Chairman Ben Bernanke hasn't said specifically what the central bank might do this year as the U.S economy moves at a snail's pace.

The dollar dropped on Tuesday in relation to other major currencies, and that tends to push oil lower. Oil is traded in U.S. currency and tends to fall when the dollar rises and makes crude more expensive for investors with foreign money.

Independent oil analyst Jim Ritterbusch said he doesn't expect the Fed to repeat its previous stimulus program, but any stimulus would help. If the economy gets extra support from the government, investors will likely expect energy demand to rise and pour more money into oil, he said.

Oil rose Tuesday despite a stark warning from the International Monetary Fund that the world economy is entering a "dangerous new phase." The IMF said that a drop in bank lending and weak consumer confidence is strangling the U.S. and European economies.

It downgraded its growth forecast for the U.S. and Europe through the end of next year. The IMF expects the U.S. economy to grow just 1.5 per cent this year and 1.8 per cent in 2012. The eurozone economy will grow 1.6 per cent this year and 1.1 per cent next year, the IMF said.

"Any way you slice it, energy demand is poor," analyst and trader Stephen Schork said. "Yet oil keeps rising." Schork said that oil is following the stock market higher, and it's also being treated as a relatively safe investment like silver and gold.