Oil down to near $86 ahead of U.S. Fed meeting

Oil prices fell to near $86 a barrel Wednesday as the dollar gained on the euro and traders looked to a U.S. Federal Reserve meeting for possible stimulus measures to spur economic growth.

By early afternoon in Europe, benchmark oil for October delivery was down 79 cents at $86.13 in electronic trading on the New York Mercantile Exchange. Crude rose $1.11 to settle at $86.92 on Tuesday.

In London, Brent crude for November delivery was up 29 cents at $110.83 on the ICE Futures exchange.

Investors will be closely watching the U.S. Federal Reserve's two-day meeting, which ends later today. Some investors expect the Fed to announce a plan to sell short-term Treasury bonds and buy longer-term ones — a policy dubbed "twist" — in a bid to spur economic growth.

"It would theoretically lower long-term interest rates," energy consultant Cameron Hanover said in a report. "We would be surprised if any sudden, new course was decided."

Gains by the dollar helped keep oil prices in check by making crude more expensive for investors holding other currencies, while downward pressure also came from falling equity markets in Europe.

The euro slipped to $1.3643 from $1.3688 late Monday.

"It seems that the recent gains in the oil market have been short-lived as investors remain cautious amid fragile economic conditions in the eurozone, while decisions from the crucial (Fed) meeting ... will provide an interesting insight about the U.S. economic prospects, giving the market some clear direction," said a report from Sucden Financial Research in London.

Signs of sluggish U.S crude demand weighed on prices. The American Petroleum Institute said late Tuesday that crude inventories rose 2.6 million barrels last week while analysts surveyed by Platts, the energy information arm of McGraw-Hill Cos., had predicted a drop of 1.0 million barrels.

Inventories of gasoline added 62,000 barrels last week while distillates increased 81,000 barrels, the API said.

The Energy Department's Energy Information Administration reports its weekly supply data later Wednesday.

In other Nymex trading for November contracts, heating oil fell 0.96 cent to $2.952 per gallon and gasoline futures gained 0.23 cent to $2.6866 per gallon. Natural gas for October delivery fell 0.8 cent to $3.79 per 1,000 cubic feet.

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