Oil Futures Rally on Fed Decision

NEW YORK (DTN) -- New York Mercantile Exchange oil futures extended higher Wednesday afternoon, rallying on a bullish report on supply and demand fundamentals and a decision by the U.S. Federal Reserve to leave interest rates unchanged.

The Energy Information Administration's midmorning report showed bigger-than-expected stock draws for domestic commercial crude oil and gasoline for the week-ended Sept. 16 and stronger demand for refined products.

The report showed a 6.2 million bbl crude stock draw for last week, a 3.2 million bbl decline in gasoline inventory and a 2.2 million bbl supply build for distillates. EIA also reported gasoline implied demand rose 244,000 bpd last week, with distillates implied demand up 155,000 bpd.

This afternoon, the Federal Open Market Committee released a statement after a two-day meeting saying U.S. economic activity has picked up and job gains have been solid in recent months. The statement said the case for a hike in the federal funds rate has strengthened, but the central bank decided to wait for further progress towards its employment and inflation objectives. It added that while the labor market and household spending are both strong, business spending has slowed.

The Fed has held its rate for overnight lending between banks in a range of 0.25% to 0.50% since December 2015, when it raised rates for the first time since just before the 2007 financial crash. Three FOMC members voted against the move, wanting rates raised now. The market now expects the Fed to raise rates in December, said analysts.

The dollar index seesawed throughout the session, falling this afternoon to a three-day low after rallying to a six-week high earlier in the session. A weaker dollar is bullish for oil prices. The stock market rallied after the Fed statement.

"The Fed statement was supportive [of the market] because it means interest rates will stay low for several more months, but EIA stats is what moved the market most," said Andrew Lipow, president of Lipow Oil Associates in Houston.

NYMEX November West Texas Intermediate crude oil futures settled $1.29 higher at $45.34 bbl, near a $45.58 one-week spot high. ICE November Brent futures were 95cts higher at a $46.83 bbl settlement, off a $47.11 one-week high. NYMEX October ULSD futures were up 2.40cts at a $1.4290 gallon settlement, off a $1.44 one-week high. NYMEX October RBOB futures advanced 3.44cts to $1.3990 gallon after inside trade.

Oil futures were also boosted by an oil services workers strike today in Norway that could impact output of Brent crude from the North Sea.

However, the expected return to full service of Colonial pipeline's Line 1 curbed the RBOB rally. The gasoline pipeline was shut and then placed on restrictive service after a leak was discovered on Sept. 9 in Alabama.

Earlier today, the carrier sent out an update notice that said the plan to restore Line 01 operations via the bypass continues on schedule.

"Based on operational progress made overnight and the anticipated schedule of work ahead, Colonial projects that Line 01 will be restarted this evening," the notice added.

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