Oil prices fell below $69 a barrel Wednesday, but were up from earlier lows, as investors continued to focus on the value of the U.S. dollar, which typically trades inversely to commodities, and awaited a policy statement from the Federal Reserve.
By mid-afternoon in Europe, benchmark crude for August delivery was down 25 cents to $68.99 a barrel in electronic trading on the New York Mercantile Exchange. Earlier in the session, it fell to $68.06 before recovering. On Tuesday, it rose $1.74 to settle at $69.24.
Oil came off an eight-month high near $73 a barrel earlier this month, and has hovered in the upper $60s this week, as investors eye the dollar and buy crude as protection against possible inflation down the road.
"Crude is following the dollar," said Jonathan Kornafel, Asia director for market-maker Hudson Capital Energy in Singapore. "Right now, crude is largely being bought as an inflation hedge."
The euro was slightly lower at $1.4068 from $1.4083 late Tuesday in New York, while the British pound rose to $1.6583 from $1.6454 in the previous session. On Tuesday, the dollar slumped 2.37 cents against the euro.
The Energy Department's Energy Information Administration is due to release its weekly petroleum inventory data, but analysts said that with the dollar steering oil prices, the stock figures could be overridden by news from the U.S.
Federal Reserve meeting.
"As far as today goes, traders will looking to the Fed, rather than the DOE to ascertain crude oil's path," said The Schork Report edited by U.S. trader and analyst Stephen Schork.
The Fed is widely expected to keep its key interest rate near zero, but investors will be watching closely the central bank's assessment of the economy for clues about any recovery.
Higher interest rates could strengthen the dollar and help contain inflation — and likely result in lower commodities prices.
In the DOE report, analysts expect a drop of 1.2 million barrels in commercial crude stocks and a build-up of 1 million barrels in gasoline stocks, according to a survey by Platts, the energy information arm of McGraw-Hill Cos.
A three-month rally that brought crude from below $35 a barrel in March stalled this month on growing doubts the world economy will be in recovery mode by the end of this year.
Traders also expect volatility to ease over the next couple months as many investors take summer holidays.
"July and August are typically very dead trading months," Kornafel said. "I think we're stuck in a range for now between the mid-$60s and $70."
In other Nymex trading, gasoline for July delivery fell 3.82 cents to $1.8550 a gallon and heating oil dropped 1.50 cents to $1.7540. Natural gas for July delivery fell 9 cents to $3.789 per 1,000 cubic feet.
In London, Brent prices fell 26 cents to $68.54 a barrel on the ICE Futures exchange.
