Investing.com-- Oil prices retreated from the previous session's highs Wednesday as caution set in ahead of the Fed decision, overshadowing data showing weekly U.S. crude stockpiles fell more than expected.
By 13:47 ET (17:47 GMT), the U.S. crude futures traded 1.6% lower at $81.02 a barrel and the Brent Oil Futures contract dropped 0.9% to $85.72 a barrel.
U.S. weekly crude supplies in larger-than-expected decline
Inventories of U.S. crude fell by 1.95M barrels for the week ended Mar. 8, compared with expectations for a draw of 0.9 million barrels, the Energy Information Administration reported Wednesday.
The outsize draws in gasoline inventories continued, falling by 3.3M barrels, compared with expectations for a draw of 1.35M barrels, while supplies of distillate -- the class of fuels that includes diesel and heating oil – unexpectedly rose by 624,000, missing expectations for a decrease of 87,000 barrels.
Caution ahead of Fed decision
The crude market has slipped lower Wednesday, weighed by a stronger dollar as investors braced for the U.S. Federal Reserve's interest rate policy announcement later in the day.
While the Fed is widely expected to maintain interest rates at elevated levels, hotter-than-expected U.S. inflation data over the last couple of weeks have raised concerns that central officials could take a more hawkish stance regarding future rate cuts.
This has boosted the U.S. dollar, which traded close to two-week highs earlier Wednesday, making crude more expensive for buyers using other currencies.
Tight global supplies
That said, both contracts remained close to their highest levels since November, having rallied sharply in recent sessions amid growing signs of tighter global supplies, especially after Ukrainian strikes on key Russian fuel refineries shut down production capacity.
Additionally, some members of the Organization of Petroleum Exporting Countries signaled they will reduce production in the coming months, with the cartel also maintaining its current pace of supply cuts until June.
"Supply risks surrounding Russian refined products continue to provide support at a time when the market is set to tighten following the rollover of additional voluntary cuts from OPEC+ into 2Q24," analysts at ING said, in a note.
"This expected tightening is reflected in the forward curve which is trading in deeper backwardation."
On the demand front, U.S. crude demand is expected to increase as major refineries resume production after an extended break. Chinese fuel demand was also seen improving during the Lunar New Year holiday, although the pace of growth in China’s oil imports slowed.
(Peter Nurse, Ambar Warrick contributed to this article.)