Oil up as Fed sees low rates through late 2014

Crude oil futures rose on Wednesday as investors cheered a plan by the U.S. Federal Reserve to keep interest rates low at least through late 2014, much longer than it had said previously, in a move aimed at helping speed the slow economic recovery.

Following a two-day policy meeting, the Fed said that, while the economy was expanding moderately despite slowing global growth, the U.S. unemployment rate was still elevated and that the economy faces "significant downside risks."

"While we did not get an indication of an implementation of a third round of quantitative easing, the Fed is clearly continuing in an activist mode with the extension of the 'exceptionally low' interest period," said John Kilduff, partner at Again Capital LLC in New York.

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"This bodes well for a lower dollar and higher commodity prices (as) the Fed looks to be willing to continue to stoke inflation as part of its efforts to revive the economy," he added.

Near the close of the market, after the Fed issued the full text of its longer-run goals and policy strategy, oil futures pared gains.

"As the Fed released the text of its policy-setting pronouncements for the day, some profit-taking pared gains, said Phil Flynn, analyst at PFGBest Research in Chicago.

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"We saw that some Fed policymakers preferred to see the first rise in interest rates by this year, with some others eyeing increases by as far as 2016. On that score, investors probably reined in their longer-term view of policy accommodation from the Fed," Flynn added.

U.S. crude futures for February delivery settled at $99.40 a barrel, gaining 45 cents, after rising to a session high of $100.40, having climbed from a session low of $97.53.

Implied volatility in U.S. crude futures tumbled to a six-month low even as prices traded in a nearly $3 range.

In London, ICE Brent crude for March delivery settled at $109.81, down 22 cents, after hitting session high of $110.89.

In post-settlement electronic trading, Brent rebounded and was up 47 cents at $110.50 by 4:23 p.m. (2123 GMT), while U.S. crude rose 93 cents to $99.87.

Oil prices regained momentum after the close as Fed Chairman Ben Bernanke signaled that the central bank may consider further monetary easing.

Bernanke also suggested that the Fed might be willing to tolerate inflation above its newly unveiled target of 2 percent if it means putting a dent on high unemployment.

Brent's premium against U.S. crude narrowed to $10.41, after closing at $11.08 on Tuesday.

Brent's trading volume shot up 53 percent above its 30-day average. U.S. crude volume was up 14 percent against the 30-day average.

STOCK BUILD OVERSHADOWED

The bullish Fed news overshadowed earlier U.S. government data showing crude inventories rose and worries over a potential Greek debt default.

The U.S. Energy Information Administration said that domestic crude oil inventories jumped 3.6 million barrels in the week to January 20, far above the 800,000-barrel build forecast in a Reuters poll.

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However, the EIA's data was far less than the 7.3 million-barrel build reported by industry group American Petroleum Institute on Tuesday.

EQUITIES UP, DOLLAR DOWN

Oil futures rose with equities and other major commodities in the wake of the Fed statement.

The euro jumped to a near five-week high against the U.S. dollar, a situation that encourages buying of riskier assets such as oil and other commodities.

A gloomy outlook for the euro zone, centering on Greek's debt troubles, keeping gains for the day limited, traders said.

After weeks of bargaining, Greece hopes to conclude tough debt-restructuring negotiations when its private creditors return to Athens for fresh round of talks to avoid a messy default.

Britain's economy may have entered a mild recession in the last three months of 2011, as the economy shrank by 0.2 percent at the end of the year. The British finance minister blamed the euro zone crisis for the contraction.

The International Monetary Fund on Tuesday said that Europe's debt crisis could tip the world economy into recession and a bigger firewall was urgently needed to keep the damage from spreading.