Oil rises on U.S. stockpile drawdown ahead of Fed decision

By Lisa Barrington

LONDON (Reuters) - Oil rose on Wednesday after an unexpected drawdown in U.S. stockpiles and an increase in U.S. gasoline prices, but concerns remained about a global surplus, falling Asian demand and whether the Federal Reserve would raise interest rates.

U.S. crude futures strengthened 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.

Front-month U.S. West Texas Intermediate (WTI) crude futures traded 80 cents higher at $45.39 per barrel at 1030 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 76 cents at $48.51 a barrel. The Brent October contract expired on Tuesday.

Global stock markets rose ahead of a U.S. Fed two-day session to decide whether to raise rates for the first time in a decade.

Higher U.S. interest rates would likely attract cash from money traders, lifting the dollar. That could be bearish for oil markets as it would raise prices for holders of other currencies.

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.

The spread was around $2.68 on Wednesday.

"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)