Oil Dips Ahead of Fed Rate Decision

LONDON, July 26 (Reuters) – Oil prices edged lower on Wednesday, with investors cautious ahead of an expected Federal Reserve rate hike later in the day and a spike in U.S. crude supplies.

Brent crude futures was down 85 cents to $82.79 a barrel by 1026 GMT, while U.S. West Texas Intermediate (WTI) crude was at $78.82, down 81 cents. Both hit three-month highs on Tuesday.

Oil prices have been rallying for four weeks, with investors buoyed by signs of tighter supplies, largely linked to output cuts by the Organization of the Petroleum Exporting Countries (OPEC) and allies, as well as pledges by Chinese authorities to shore up the world’s second-biggest economy.

However, there are concerns around whether China, also the world’s second biggest oil consumer, will actually be able to step up policy support.

“We still need to wait for actual policies – the risk is that these policies fall short of expectations,” said ING head commodities strategist Warren Patterson.

“The market will continue to be in a tug-of-war between tightening global supply and fears of slowing demand due to the global economic slowdown,” added Hiroyuki Kikukawa, president of NS Trading, a unit of Nissan Securities.

Investors had also squared their positions ahead of the Fed rate decision, Kikukawa continued.

The U.S. central bank is widely expected to deliver a 25 basis-point rate hike later on Wednesday.

“Today’s rate hike, if it occurs, is widely anticipated to be the last one before a long pause, yet Fed officials will be very wary of raising false hopes of calling a day on the unprecedented monetary tightening programme,” said PVM analyst Tamas Varga.

Meanwhile, U.S. crude stocks rose by about 1.32 million barrels in the week ended July 21, according to market sources citing American Petroleum Institute figures on Tuesday. Analysts polled by Reuters had expected a 2.3 million barrel drawdown.

The surprise build in crude and distillate stocks – if confirmed by U.S. government data later today, added Varga, “could temporarily take the wind out of the bull’s sail.”