Oil plunges 4% on inventory jump, Fed statement

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NEW YORK (CNNMoney.com) -- Oil prices tumbled below $68 a barrel Wednesday after the government reported a surprise increase in crude supplies and the Federal Reserve left interest rates unchanged.

Oil for November delivery fell $2.79, or nearly 4%, to settle at $68.97a barrel. Prices initially slipped below $68 after the government's inventory report showed a sharp rise in crude stocks earlier in the day, but held steady after the Fed statement.

"It was definitely a bearish [inventory] report and got sellers invigorated," said MF Global energy analyst John Kilduff.

"Prices have been oscillating back and forth depending on whether or not investors think the economy is picking back up sufficiently to impact global demand," Kilduff said. "This is a report where the edge goes to economic activity not being robust enough to keep pace with the loft price level we've been seeing."

A weak dollar had been propping up prices recently. The greenback was narrowly mixed against the yen, euro and pound on Wednesday. Oil, like other commodities, is priced in dollars so when the U.S. currency weakens, commodities become cheaper for investors holding other currencies.

"The dollar's decline continues to provide terrific support for oil prices and other commoditities, and it won't stop anytime soon," said Kilduff. "The massive amount of stimulus and the deficit will continue to impact the dollar and stoke up inflation fears."

The Federal Reserve's two-day meeting ended Wednesday, and the Federal Open Market Committee held interest rates unchanged levels near zero, as expected. The accompanying statement said that although "economic activity will remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions...will support a strengthinging of economic growth and a gradual return to higher levels of resource utilization in a context of price stability."

Prior to the statement, Kilduff said indications of an economic recovery will support crude oil prices because "improvements in economic theory translate to increased energy demand."

Inventory rising. The Energy Information Administration reported a surprise increase in crude stocks by 2.8 million barrels in the week ended Sept. 18. Analysts were expecting a drop of 2.25 million barrels, according to a consensus estimate collected by energy information provider Platts.

Gasoline stockpiles jumped by 5.4 million barrels, according to the EIA report. Analysts had forecasted a more modest increase of 800,000 barrels.

The government report also showed that distillates, used to make heating oil and diesel, rose by 3 million barrels, topping analysts' expectations for a 1.5-million-barrel increase.

Gasoline prices. The national average price for a gallon of regular unleaded gas decreased to $2.540, down four tenths of a cent from the previous day's $2.544, according to motorist group AAA.