Oil sheds gains, stocks dip as Fed comes into focus

Oil shed some of its gains on Tuesday as the US raised the possibility of releasing crude reserves, while stocks inched lower as investors waited for this week's Federal Reserve meeting.

The record gains on Monday were fuelled by an attack on Saudi facilities that wiped out half the country's crude output.

Traders were nervously awaiting further US response after it said Iran was likely to blame. The crisis revived fears of a conflict in the tinderbox Gulf region and raised questions about the security of crude fields in the world's top exporter Saudi Arabia as well as other producers.

"Oil prices have settled in the wake of Monday's 20-percent spike caused by a drone attack on a major Saudi Arabian refinery but [shares in] oil companies and utilities continue to trade higher," noted Fiona Cincotta, senior market analyst at City Index trading group.

In the US, gasoline prices jumped on Tuesday after crude oil futures spiked nearly 15 percent following the weekend attacks, according to a report by the AAA motor club.

The average national gasoline price jumped 3 cents to $2.59 per gallon on Tuesday, AAA said on its website. On Monday, the motor club said the price was $2.56.

Waiting on the Fed

The attack has also taken attention away from the upcoming trade talks between China and the US on Thursday, as well as a much-anticipated policy meeting of the Federal Reserve.

Wall Street was set to open slightly lower on Tuesday as investors stayed away from making big bets ahead of the Federal Reserve's two-day policy meeting, where it is widely expected to cut interest rates.

European shares opened lower, with energy stocks giving up gains as crude prices eased. The pan-European STOXX 600 index dropped 0.2 percent.

MSCI's All-Country World Index, which tracks shares across 47 countries, was down 0.1 percent on the day.

In Asia, MSCI's broadest index of Asia-Pacific shares outside Japan was down 0.76 percent. Chinese shares fell 1.68 percent. Hong Kong shares slumped 1.23 percent.

Brent crude oil, the international benchmark, fell 1.78 percent to $67.79 per barrel on Tuesday. On Monday, it surged as much as 14.6 percent for its biggest one-day percentage gain since at least 1988.

US West Texas Intermediate futures were down 1.70 percent to $61.85 per barrel following a 14.7 percent surge on Monday, the biggest one-day gain since December 2008.

Saturday's attack on Saudi oil facilities has halved the kingdom's oil output, creating the biggest disruption to global oil supplies in absolute terms since the overthrow of the Iranian Shah in 1979, International Energy Agency data show.

US President Donald Trump has authorised the release of emergency crude stockpiles if needed, which could ease some upward pressure on crude futures.

Geopolitical uncertainty 

Trump said on Monday it looked like Iran was behind the attacks but stressed that he did not want to go to war, striking a slightly less bellicose tone than his initial reaction.

Iran has rejected US charges that it was behind the attacks. 

Tensions between the two countries were already running high over Iran's suspected ambitions to assemble nuclear weapons. The strikes in Saudi Arabia are likely to raise regional tensions further.

"Although Saudi Arabia's spare capacity and US Strategic Petroleum Reserves could plug some of the lost output, where oil trades in the near term will be influenced by how long it takes for Saudi production to fully recover," said Lukman Otunuga, research analyst at FXTM.

"It is this concern over negative supply shocks amid geopolitical tensions which should keep oil prices buoyed in the short term."

The yield on benchmark 10-year Treasury notes slipped to 1.8223 percent. 

Eurozone government debt yields edged lower amid the geopolitical uncertainty stemming from the Saudi attack.

The dollar was flat against a basket of other currencies.

The Fed is expected to cut interest rates at a policy meeting ending on Wednesday, although disagreement exists among policymakers.

Hinging on Fed interest rate drop

Trump on Monday said on Twitter that the Fed should enact a "big interest rate drop, stimulus."

However, historical precedent suggests the Fed is likely to cut the expected quarter of a point and go no further.

Futures contracts tied to the Fed's policy rate imply a 64.9 percent chance the US central bank will cut its benchmark rate by a quarter of a point to a range of 1.75 percent to 2 percent on Wednesday.

Gold prices were higher by 0.04 percent at $1,498.52 per ounce.

"To have a lasting impact on gold, much higher oil prices would be needed, i.e. well above $80 per barrel, in order to trigger a major inflationary shock, hitting the economy and slowing global growth," said Carsten Menke, commodity analyst at Julius Baer.