Crude oil futures prices settled higher Wednesday spurred by a sharp decline in gasoline inventories and by expectations that Federal Reserve policy will keep the dollar weak.
The Federal Open Market Committee said it would keep interest rates at ultra-low rate and would end its $600 billion bond-buying program in June, as expected. The loose monetary policy kept the dollar under pressure against higher-yield currencies such as the Australian dollar.
Rich Ilczyszyn, an oil market strategist at Lind-Waldock, said the FOMC statement didn't hold surprises.
"Oil prices have soared for the simple reason that the dollar is weak, and that's going to be the case until they raise rates. We're going to continue to go upward," he said. The Fed said in its statement it will continue to hold interest rates close to zero "for an extended period."
Light, sweet crude oil futures for June delivery on the New York Mercantile Exchange settled 55 cents higher at $112.76 a barrel. Crude ended just 3 cents below the April 8 settlement of $112.79 a barrel, which was the highest since Sept. 22, 2008. ICE Brent crude for June settled 99 cents higher, at $125.13 a barrel.
Jim Ritterbusch of Ritterbusch and Associates said the Fed statement reinforces his view that Nymex crude will soon challenge $119 a barrel, and Brent was run up to $130 a barrel.
A higher-than-expected drop in U.S. gasoline inventories was the driving force in the market, overcoming a bearish surprise in rising crude oil inventories.
Gasoline stocks fell 2.5 million barrels and the level of inventory relative to demand is at its lowest level since September 2009, Energy Information Administration data for the week ended April 22 showed. Analysts had expected a drop of 1.1 million barrels.
Traders focused on the inventory data, rather than figures showing that gasoline demand in the latest four weeks is down 1.6% from a year ago, as retail prices are up 36% from a year ago and a 0.8% rise in year-to-date demand reported a month ago has been erased.
The strength in gasoline pulled up crude oil prices, which initially declined as the data showed crude stocks rose by 6.2 million barrels, far more than expected.
"Anybody who sold crude on the basis of the 6.2 million-barrel build in crude ran the risk that gasoline would yank it back to the upside," said Tim Evans, analyst at Citi Futures Perspective. "My hair is not on fire about gasoline inventory" levels, because demand is weakening in response to high prices, he said.
May delivery reformulated gasoline blendstock prices settled 6.22 cents a gallon higher, at $3.4194 a gallon, the highest level since July 14, 2008. Gasoline prices have gained 5.8%, or 18.6 cents a gallon, in the past five days. Given the 65 cents a gallon long-term differential between futures and retail prices, Wednesday's futures settlement, if sustained, suggests a move to $4.07 a gallon at the pump, near the record high level of $4.11 a gallon in July 2008.
Heating oil for May delivery settled 2.23 cents higher, at $3.2334 a gallon.