Oil. Picture: REUTERS
Picture: REUTERS

SINGAPORE — Brent prices held above $114 a barrel on Wednesday, near a more than three-month high hit in the previous session, on optimism about the US economy after data out of the world’s largest oil consumer showed a recovery was gaining ground.

Still, investors remained cautious about making big bets before the outcome of a two-day Federal Reserve policy meeting and first estimates for fourth-quarter US gross domestic product due later in the day.

Brent crude edged up 4c to $114.40 a barrel by 5.20am GMT, just 9c away from Tuesday’s high of $114.49. US oil was down 3c at $97.54, after gaining nearly 1.2% in the previous session.

"There are bullish reasons to see oil prices rise and our view is that this week we will continue to see better-than-expected US data, which should move oil in the same direction," Société Générale commodities strategist Jeremy Friesen said in Hong Kong.

"But we do think the supply side is probably enough and ultimately should cap oil prices in the second quarter."

Investor sentiment got a boost after US home prices rose in November, climbing more than 5% from a year ago, in the biggest increase since August 2006, when the housing market was starting to collapse.

But the focus is now on the Fed’s monetary policy committee, which started its two-day meeting on Tuesday. The Fed has said it expects to keep short-term US interest rates exceptionally low to help support the economy.

The low rates have helped push up oil prices, as investors pour cash into riskier asset classes.

"At the January (Fed policy) meeting, we believe that the Fed is unlikely to make any major policy changes, but the Fed is likely to mention the modestly improving US economy," Prestige Economics president Jason Schenker said in a report. "This could be dollar bullish."

The short-term oil outlook was also buoyed by optimism of growth acceleration in China.

China’s factory activity in January probably expanded at its fastest pace in nine months, according to a Reuters poll ahead of official purchasing managerd index data on Friday, adding to signs that recovery momentum is building as domestic demand strengthens.

The rebound in China’s growth is expected to continue until the second quarter before fading in the second half, though an economic rebound elsewhere towards year-end will likely sustain global growth rates for the year, Mr Friesen said.

German consumer morale rose for the first time in four months while French consumer confidence held steady in January as fears of job losses eased, fuelling hope that demand will prop up growth in these countries.

"We do think US and European growth statistics will pick up at end of the year. The main driver of this optimism near-term has been China but we don’t think it’ll last the whole year," Mr Friesen said.

"That’s generally positive for the commodity space but for the oil market in particular, oil supply is probably enough to cap that, barring any sudden supply risks."

Supply risks from the Middle East capped oil price gains after at least 65 people were found shot dead with hands bound in the northern Syrian city of Aleppo on Tuesday in a "new massacre" in the nearly two-year revolt against President Bashar al-Assad, activists said.

US oil inventories

US crude stocks rose 4.2-million barrels last week, the American Petroleum Institute (API) reported on Tuesday.

Crude stocks at Cushing fell by 15,000 barrels, according to the API, while petrol stocks rose by 2.4-million barrels and distillate stocks were 1.8-million barrels lower, the API said.

Analysts had expected US crude stocks to rise by 2.6-million barrels, according to a Reuters survey ahead of weekly inventory reports from the API and the US government’s Energy Information Administration (EIA).

The EIA weekly inventory report is due on Wednesday at 3.30pm GMT.

Brent faced resistance at $114.54 a barrel, a break above which would lead to a gain to $116.11, while US oil was expected to rise further, to $98.35, Reuters technical analyst Wang Tao said.

Reuters