Oil drops 3 pct as U.S. supplies swell, Fed hikes rates

Higher U.S. rates are expected to support the dollar, which should pressure oil prices, making oil costlier for holders of other currencies. (Reuters file picture shows a pumpjack bringing oil to the surface in the Monterey Shale, California.)

NEW YORK: Oil fell more than 3 percent on Wednesday, snapping a two-day rebound after U.S. government data showed a surprise weekly build in crude inventories and the Federal Reserve raised interest rates for the first time in nine years.

The rate hike signaled faith that the U.S. economy had largely overcome the 2007-2009 financial crisis. Higher U.S. rates are expected to support the dollar, which should pressure oil prices, making oil costlier for holders of other currencies.

The dollar firmed modestly after the rate rise. Based on interest rate futures markets, traders expected a second rate hike in April.

Oil traders were already worried about a growing global glut of oil which has pressured prices in recent weeks. Data from the U.S. Energy Information Administration showed crude inventories up 4.8 million barrels last week. Analysts in a Reuters poll had forecast a decrease of 1.4 million barrels. [EIA/S]

Brent January futures , which close on Wednesday, fell $1.26, or more than 3 percent, to settle at $37.19 a barrel. It fell as low as $37.11, which was less than $1 away from its 2004 lows. Brent's February contract closed at $37.39, down $1.34.

U.S. crude futures settled down nearly 5 percent, or $1.83, at $35.52 a barrel, not far from the $32.40 hit during the financial crisis in 2008.

"I don't view the FOMC statement as being all that supportive and now that we have the announcement behind us, it's back to fundamentals," said Chris Jarvis, president and senior analyst at Caprock Risk Management in Maryland.

In a preliminary report on Tuesday, industry group American Petroleum Institute (API), had reported a more modest weekly build in U.S. crude stockpiles of 2.3 million barrels.- Reuters