Oil above US$86 a barrel on hopes Fed will do more to stimulate US economy

The price of oil rose to above US$86 a barrel on Wednesday as investors expected the Federal Reserve to announce new measures to perk up the U.S. economy.

By early afternoon in Europe, benchmark West Texas Intermediate crude for January delivery was up 70 cents to US$86.49 a barrel in electronic trading on the New York Mercantile Exchange. The contract rose 23 cents to finish at US$85.79 in New York on Tuesday, after falling for five straight sessions.

Brent crude, used to price international varieties of oil, was up 90 cents to US$108.91 per barrel on the ICE Futures exchange in London.

There’s widespread expectation in the markets that the Fed will on Wednesday announce more bond-buying. The Fed has been selling $45 billion a month in short-term Treasuries and using the proceeds to buy an equal amount of longer-term securities. The intent is to lower long-term borrowing rates in the market and encourage spending.

“Following expectations for further stimulus in the U.S. economy from the (Fed), the dollar has been under pressure against the euro, providing some support to the oil market,” said a report from Sucden Financial Research in London.

A weaker dollar makes crude cheaper for investors trading in other currencies. On Wednesday, the euro was up at US$1.3046 from $1.3009 on Tuesday.

Prices were also supported by the International Energy Agency’s monthly oil market report. The Paris-based group raised its 2013 demand growth estimate by 110,000 barrels a day over its November forecast, to 90.5 million barrels a day, but noted that demand was still far from robust.

“Global demand growth is expected to stay relatively sluggish through 2013, based on the continued assumption of tepid global economic expansion — notwithstanding signs that Chinese sentiment has turned mildly positive — and despite stronger than expected preliminary demand data for October,” the IEA said.

OPEC oil ministers, meanwhile, signalled Wednesday in Vienna that they were going to keep current output targets unchanged, as markets expected, even though members’ total production has been more than one million barrels a day higher than the agreed quota of 30 million barrels a day.

In other energy futures trading on Nymex, heating oil added 2.5 cents to US$2.952 a U.S. gallon (3.79 litres), wholesale gasoline rose 2.51 cents to US$2.6356 a gallon and natural gas gained 2.6 cents to $3.438 per 1,000 cubic feet.