Oil firmer on Fed QE speculation

"The big focus remains on the U.S. Federal bank meeting today," says Oliver Jakob of consultancy Petromatrix.

Brent crude rose 71 cents to $118.87 a barrel by 7:00 a.m. EDT (1100 GMT), while U.S. crude was up 56 cents at $104.11.

A third round of monetary stimulus or quantitative easing, also called QE3, should boost liquidity in markets and lift appetite for riskier assets such as oil.

"If there are hints at more quantitative easing, oil prices will shoot up again, as they are well off their highs," Michael Hewson, analyst at CMC Markets.

However, he said investors may be disappointed as he thought quantitative easing was unlikely to happen before the U.S. presidential election.

The latest U.S. data was mixed, showing February home prices rising for the first time in 10 months while a measure of consumer confidence last month fell more than expected.

An uncertain picture over the health of the global economy continued to weigh on prices.

China's slower growth rate, its weakest first quarter in three years, has raised concern among investors, especially at a time when the debt-ridden euro zone's economic slump is deepening and the U.S. economic recovery remains fragile.

There were more signs of strain in Britain too, which has entered a second recession since the financial crisis, data showed on Wednesday.

INVENTORIES WATCHED

Also supporting U.S. crude, oil inventories in the world's top consumer fell last week for the first time in five weeks, data from the American Petroleum Institute (API) showed on Tuesday, against expectations for a build. <API/S>

U.S. crude stockpiles fell by 985,000 barrels in the week to April 20, compared with analyst expectations of a 2.7-million-barrel increase.

Gasoline stocks fell 3.6 million barrels, dropping more sharply than an expected 900,000 barrels, and distillate inventories fell by 3.56 million barrels, the API said.

The U.S. Energy Information Administration's own stockpiles report is due later on Wednesday.

U.S. crude oil stockpiles were expected to have increased for a fifth straight week last week due to another increase in imports, an expanded Reuters poll of analysts showed on Tuesday. <EIA/S>

Recent gains in U.S. oil prices have narrowed Brent's premium over WTI crude. The premium fell as low as $12.99 last week, the smallest since February.

Supply disruption concerns linked to producer Iran continue to be in focus although tensions between Tehran and the West seemed to have cooled momentarily.

Israel's rhetoric on Iran was more conciliatory than it has been recently. Israel's military chief said he does not believe Iran will decide to produce an atomic bomb.

"It is quite a strong statement but we will have to wait for the May 23 meeting in Baghdad," says Jakob, "But with the rhetoric of Israel and Iran changing, maybe to prepare public opinion for negotiation, the Iran premium could start coming off."

Iran will meet with the six world powers - the United States, Russia, China, German, France and Britain - in Baghdad on May 23 for nuclear talks.

The West alleges that Iran is developing atomic weapons, but Iran insists its nuclear program is for civilian use.

(Additional reporting by Luke Pathymuthu in Singapore; editing by William Hardy)