Oil drops as US reports smaller than expected fall in crude stocks

Oil prices fell on Wednesday as the U.S. government reported a smaller than expected draw in crude stocks last week, while investors watched for progress in Russia-Ukraine peace talks and awaited a decision on U.S. interest rates.

Brent crude futures were down 49 cents, or 0.8%, to $61.45 a barrel at 11:36 a.m. ET (1636 GMT). U.S. West Texas Intermediate crude futures were down 48 cents, also 0.8%, to $57.77.

U.S. crude oil inventories fell by 1.8 million barrels in the week ended December 5, data from the U.S. Energy Information Administration showed. 

Analysts polled by Reuters on average expected a 2.3-million-barrel crude stock draw, while the American Petroleum Institute had estimated a 4.8-million-barrel decline.

Meanwhile, markets were expecting the U.S. Federal Reserve to reduce its main interest rate by a quarter of a point on Wednesday to support a cooling labour market. The Fed's decision is due at 2 p.m. Eastern time (1900 GMT).

Lower interest rates could lift oil demand by boosting economic growth.

Market participants are also likely to pay close attention to remarks by Fed Chair Jerome Powell about the future path of U.S. monetary policy, with analysts expecting that he could signal a hawkish approach to next year's rate path.

"Comments from the Fed Chair could have some significant impact that could easily erase today's weakness in the U.S. dollar index, further stalling our expected minor increase in crude values as this week proceeds," oil trading adviser Ritterbusch and Associates said in a note.

A stronger dollar can make oil more expensive for investors holding other currencies, weakening demand for the commodity.

While the oil market is moving deeper into an expected glut, Russian supply remains a risk, ING analysts said in a note.

Ukrainian President Volodymyr Zelenskiy said his country and its European partners will soon present the U.S. with "refined documents" on a peace plan to end the war with Russia.