Oil Rallies Higher on Strong Demand

NEW YORK (DTN) -- New York Mercantile Exchange oil futures ended higher Wednesday afternoon but off highs after the Federal Reserve decided to keep interest rates unchanged but suggested economic conditions are better than when they last met in September.

The Federal Open Market Committee described economic growth as moderate, but policymakers won't be monitoring "international developments" as it suggested last month. The market read the statement as hawkish, suggesting the Fed may now in fact raise interest rates in December.

As a result, the dollar reversed higher, rallying versus a basket of six key currencies, which, in turn, put pressure on the equities and commodities markets.

Earlier, the oil complex rallied going into the Fed statement when the dollar weakened. The market had expected the Fed to delay a rate hike, but also to remain wary over slowing economic growth in China.

Oil futures were buoyed by data showing strengthening demand for crude and refined products. Spot-month West Texas Intermediate crude oil futures posted a 6% gain after bouncing off Tuesday's two-month low, just before the Fed statement was released.

NYMEX December WTI futures rallied $2.74 to settle at $45.94 bbl, off a four-day high of $46.01 bbl. The ICE December Brent futures contract rallied $2.24 to $49.05 bbl.

November ULSD futures soared 5.95 cents to settle at $1.4839 gallon, off a better than one-week high of $1.4971 gallon. Spot month RBOB futures surged 6.29 cents to settle at $1.3501 gallon, off a better than two week high on the spot continuation chart of $1.3619 gallon.

On Wall Street, U.S. stock indices turned lower as investors now expect a rate hike as early as December. The Fed statement was still slightly bullish on U.S. economic growth, which is key to oil demand. The market also awaits the advanced reading of third quarter U.S. gross domestic product on Thursday.

Improving demand provided the biggest support for the oil rally Wednesday after the Energy Information Administration midmorning reported weekly stock draws for gasoline and distillate fuels and rising demand for crude and oil products.

The EIA report detailed a 3.4 million barrel crude stock build for the week-ended Oct. 23, surpassing an expected build of 2.0 million bbl but short of the 4.1 million bbl build reported late Tuesday by the American Petroleum Institute. This is the fifth straight weekly crude oil stock build, totaling 26.0 million bbl.

EIA also reported a 1.1 million bbl stock draw for gasoline, falling short of an expected 1.3 million bbl draw, and a 3.0 million bbl stock decline for distillates that was more than expectations for a 2.2 million bbl decline.

On the demand side of the ledger, EIA reported a 271,000 barrel per day weekly increase in crude oil inputs, an 186,000 bpd rise for gasoline and a 442,000 bpd gain for distillates. EIA said implied demand for gasoline rose 186,000 bpd while up 5.4% on the year.

George Orwel can be reached at george.orwel@telventdtn.com