Investing.com-- Oil prices retreated from the previous session's highs Wednesday amid caution ahead of the latest Federal Reserve policy announcement.
By 08:55 ET (12.55 GMT), the U.S. crude futures traded 1.6% lower at $81.39 a barrel and the Brent Oil Futures contract dropped 1.4% to $86.16 a barrel.
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.
US inventories unexpectedly shrink - API
Data from the American Petroleum Institute, released Tuesday, showed that U.S. crude inventories shrank 1.5 million barrels in the week to March 22, ducking expectations for a small build.
The reading potentially marks a second straight week of draws in U.S. inventories, and comes amid increased refinery activity. A sustained drop in gasoline inventories also pointed to improving fuel demand after a winter lull.
The API data usually heralds a similar reading from official inventory data, which is due later on Wednesday. A sustained decline in U.S. inventories also fed into expectations of tighter global supplies, especially amid rising gas prices in the world’s biggest fuel consumer.
(Ambar Warrick contributed to this article.)