Oil hovers above $88 as hopes fade for Fed easing

August 1, 2012 - 8:36 AM
Gas Prices-July

FILE - In this July 10, 2012 file photo, Suzanne Meredith, of Walpole, Mass., gases up her car at a Gulf station in Brookline, Mass. Gasoline is at $3.50 per gallon for the first time this summer after a sharp run-up in July. The price of gas rose 17 cents per gallon, or 5.1 percent this month, as oil rose and drivers burned more fuel on summer road trips. It was the first monthly increase since March, and the biggest gain in any July since auto club AAA started keeping records in 2000. (AP Photo/Steven Senne, File)

Oil hovered above $88 a barrel Wednesday as hopes dimmed the Federal Reserve will announce a further loosening of monetary policy to boost the flagging U.S. economy and China's manufacturing stayed weak.

By early afternoon in Europe, benchmark crude for September delivery was up 24 cents at $88.30 a barrel in electronic trading on the New York Mercantile Exchange. The contract lost $1.72 to settle at $88.06 in New York on Tuesday.

In London, Brent crude was up 70 cents at $105.62 on the ICE Futures exchange.

Oil prices have retreated from around $106 a barrel on May 1 as demand for crude has deteriorated on the back of Europe's debt crisis and slowing growth in China.

Expectations are fading that the Fed will announce new measures to boost the U.S. economy after a two-day policy meeting that ends Wednesday.

"Most of the price gains since last week were after all caused by exaggerated hopes of what the central banks might do," said analysts at Commerzbank in Frankfurt. "If, contrary to expectations, the Fed does resolve on concrete quantitative easing (Wednesday) in order to stimulate the economy, the news would give oil prices a boost."

Traders have been guessing for months about when and whether the Federal Reserve would try to spark the economy. Hopes rose last week, then retreated Tuesday, following reports of strengthening consumer confidence and home values.

"All eyes are focused on the U.S. Federal Reserve, although expectations for a decisive move to stimulate the economy appear to be waning," said a report from JBC Energy in Vienna.

Data from China, the world's No. 2 crude consumer, showed that manufacturing slowed in July as government efforts to boost the economy couldn't completely offset weak overseas demand for exports.

The state-affiliated China Federation of Logistics and Purchasing said its purchasing managers' index, or PMI, fell 0.1 percentage point to 50.1 in July, the slowest growth in eight months and just above the 50 level signifying expansion. A separate survey by HSBC showed manufacturing contracting, albeit at a slower rate than in previous months.

"With the Chinese government accelerating its easing measures in May, it will probably still take a couple of months before we see a substantial impact from the easing measures," said a report from Danske Bank.

In other Nymex energy futures trading, heating oil added 0.82 cent to $2.8562 a gallon and gasoline was up 2.73 cents at $2.8016 a gallon. Natural gas fell 3.1 cents to $3.178 per 1,000 cubic feet.