Oil slump resumes on U.S. supply build, expected Fed rate hike

By Simon Falush

LONDON (Reuters) - Oil fell on Wednesday on fresh evidence of growing global oversupply, and as investors awaited the outcome of a U.S. Federal Reserve meeting at which interest rates are likely to be raised, boosting the dollar and pressuring commodities.

Brent was down $1.14 at $37.31 a barrel at 1543 GMT. On Tuesday, the contract closed up 53 cents in its first gain in eight days.

Analysts are watching for any test of Brent's December 2008 low of $36.20, with a break below that level taking the benchmark to levels not seen since 2004.

West Texas Intermediate crude futures were down $1.27 at $36.08 per barrel, after rising more than $1 on Tuesday. WTI was supported by looming changes to legislation that are expected to enable exports of U.S. crude oil.

The overwhelmingly bearish sentiment that has pushed Brent from above $115 per barrel in June last year returned to the fore as fresh evidence emerged that low prices are doing nothing to ease heavy oversupply.

Reinforcing a picture of a heavily over-supplied market, data from the U.S. Energy Information Administration showed crude inventories rising by 4.8 million barrels in the last week, compared with analysts' expectations for an decrease of 1.4 million barrels.

"Only the staunchest contrarian could derive anything bullish out of that report," said Peter Donovan, broker at Liquidity Energy in New York.

"The actual numbers were more bearish than all expectations, as well as more bearish than the API report released last night."

He was referring to data on Tuesday from industry group the American Petroleum Institute which showed a surprise rise of 2.3 million barrels in U.S. crude stockpiles last week.

Investors are also positioned for a rise in interest rates, which would support the dollar. A stronger dollar makes dollar-priced oil more expensive to holders of other currencies.

"The market sentiment is that this will lead to a higher dollar and push commodity prices lower," said Hans van Cleef, senior energy economist at ABN Amro in Amsterdam.

Markets are already prepared for a 25-basis-point increase but will be closely watching the Fed's policy statement for indications of where rates will go next year.

The Federal Reserve is scheduled to release its decision on Wednesday at 2 p.m. EST (1900 GMT).

On Wednesday, Brent's premium to WTI fell to just 27 cents, its lowest since January, and the North Sea benchmark may drop further relative to U.S. crude this week if the U.S. government repeals its decades-old ban on crude exports.

Scrapping the ban would lead to an abrupt end to a years-long fight triggered by the domestic shale boom and be a win for the U.S. oil industry and Republicans, who had argued the ban was an archaic relic of the Arab oil embargo era.

(Additional reporting by Aaron Sheldrick in Tokyo; Editing by Dale Hudson and Keith Weir)