Oil rises more than 2 percent ahead of Fed decision

By Lisa Barrington

LONDON (Reuters) - Oil rose more than 2 percent on Wednesday after a drawdown in U.S. stockpiles, an increase in U.S. gasoline prices, and lower-than-expected U.S. inflation data that decreased the likelihood of a Federal Reserve rate rise this week.

The U.S. Labor Department said on Wednesday its consumer price index fell 0.1 percent last month, the first decline since January, pointing to tame inflation that complicates the Fed's decision whether to raise rates.

A little over half the 80 economists polled by Reuters over the last 24 hours said they expect the Fed to hold fire slightly longer on a rate rise, after only last week narrowly predicting the Fed would pull the trigger on Thursday.

Low interest rates restrain the dollar, in which oil is priced, making crude cheaper for holders of other currencies.

U.S. crude futures strengthened earlier on Wednesday after the American Petroleum Institute (API) reported a 3.1-million-barrel drop in crude inventories last week, versus analyst expectations for an increase.

"It is a big data week," CMC Markets analyst Michael Hewson said. "We are likely seeing a bit of position adjustment ahead of key market data."

Official U.S. crude inventory figures will be released on Wednesday at 1430 GMT.

Front-month U.S. West Texas Intermediate (WTI) crude futures for October traded $1.14 higher at $45.73 per barrel at 1425 GMT, with U.S. gasoline prices up for a second straight day after a fall of around 10 percent since the start of the month.

Brent crude for November was up $1.36 at $49.11 a barrel. The Brent October contract expired on Tuesday.

The prospect of falling U.S. oil production as prices skim six-year lows has narrowed the gap between benchmark U.S. and Brent crude futures.

The Brent-WTI spread between the two prompt months shrank on Tuesday to around $1.45 a barrel, the narrowest since January, when WTI briefly cost more than Brent.

"We believe that this could be the market's reaction to the decline in U.S. crude production (drilling) ... further exacerbated as Iranian crude could be entering the market, which puts heavy pressure on the global benchmark (Brent)," said Daniel Ang, analyst at Singapore-based Phillip Futures.

Iranian crude stored in tankers could quickly enter world markets once sanctions against Tehran are lifted.

Oil prices have fallen by almost 60 percent since June 2014 on concerns about oversupply and slowing Asian demand, factors that continue to weigh on prices.

(Additional reporting by Henning Gloystein in Singapore; Editing by Dale Hudson and Jason Neely)