Oil rises on US fuel demand, Fed rate decision caps gains

By Nicole Jao

(Reuters) - Oil prices edged up on Wednesday after U.S. government data showed a draw in fuel inventories, but the Federal Reserve's decision to hold interest rates steady capped gains.

Brent crude futures settled up 22 cents, or 0.31%, to $70.78 a barrel. U.S. West Texas Intermediate crude (WTI) closed 26 cents, or 0.39%, higher at $67.16. 

U.S. crude stocks rose by 1.7 million barrels last week to 437 million barrels, U.S. government data showed, exceeding the 512,000-barrel rise analysts had expected.

However, distillate inventories, which include diesel and heating oil, fell by 2.8 million barrels last week to 114.8 million barrels, far surpassing expectations for a 300,000-barrel drop.

"The EIA showed a net draw including products, which is incrementally bullish," said Josh Young, chief investment officer at Bison Interests.

The Israeli military resumed ground operations in the central and southern Gaza Strip, a day after local health workers said more than 400 Palestinians were killed in airstrikes that shattered a ceasefire.

U.S. President Donald Trump this week vowed to continue his country's assault on Yemen's Houthis and said he would hold Iran responsible for any attacks carried out by the group that has disrupted shipping in the Red Sea.

"Traders are being forced to refocus on Mideast geopolitical risks as Israel and the United States launch attacks on Gaza and Yemen, respectively," said Clay Seigle, senior fellow for energy security at the Center for Strategic and International Studies.

The Fed held rates steady at the 4.25%-4.50% range as expected, but policymakers signaled they still anticipate reducing borrowing costs by half a percentage point by the end of this year in the context of slowing economic growth and a downturn in inflation.

U.S. tariffs on Canada, Mexico and China have raised fears of recession, and worries of slower energy demand weighed on oil prices.

Investors also watched Ukraine ceasefire talks. Russia agreed to Trump's proposal that Moscow and Kyiv temporarily stop attacking each other's energy infrastructure, a move analysts say increases chances for peace and eventually for Russian oil to re-enter global markets.

However, the prospect of a full ceasefire remained uncertain. Russia and Ukraine accused each other of violating a new agreement to refrain from attacks on energy targets, hours after it was agreed by Trump and Russian President Vladimir Putin. A prisoner swap went ahead.

"Even if a deal is struck, it will likely take some time before Russian energy exports increase in a significant way, with the short-term impact being around diversion of flows in order to attract better pricing," said Panmure Liberum analyst Ashley Kelty.

Russia is among the world's top oil suppliers, but its output has waned during the war, which resulted in sanctions on Russian energy.

(Reporting by Nicole Jao and Laila Kearney in New York, Jeslyn Lerh in Singapore and Arunima Kumar in Bengaluru; Editing by Jamie Freed, Mark Potter, Elaine Hardcastle, Nia Williams and David Gregorio)