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Churn and burn: Why oil’s waiting on the Fed

Commodities tomorrow: Oil up 5% today

There has been plenty of volatility in the oil price this year, but the general direction of travel has been only one way – down.

After a close to 6 percent rise in the WTI oil price to $47.15 on Wednesday, traders are increasingly optimistic that oil may have hit its lowest level of the recent cycle in August, when it fell to $37.75.

A Petrobras oil platform floats in the Atlantic Ocean near Guanabara Bay in Rio de Janeiro.
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"The present price action on WTI still suggests to us that a turn is developing," Citi analysts, who have been bullish on the commodity for some time, argued in a research note Thursday morning.

Wednesday's leap in the price was motivated by several different factors: reports that U.S. crude inventories fell in the most recent week; increased concerns about U.S. involvement in the Middle East and, as with much of the rest of the market, second-guessing whether the U.S. Federal Reserve (Fed) will move to hike interest rates for the first time in more than a decade on Thursday.

Usually, if rates rise, oil would be expected to fall, as a stronger U.S. dollar (which would be forecast to follow a Fed rise) hits demand from importing countries. Ahead of today's decision there is still considerable uncertainty over what Chairman Janet Yellen and the other members of the Fed's rate-setting committee will do.

The interplay between what central banks can and will do, and the price of oil, has been close – some might argue too close.

Oil's relatively low cost, and its dampening effect on inflation, has been one of the key factors holding back central banks across the West from raising rates and returning to normal monetary policy in the post-financial crisis world.

Without a decision from the Fed, analysts are reluctant to make a call on whether oil prices will continue to rally.

The cost of oil, in the cautious words of Citi analysts, is still "churning and burning but also may be turning".

- By CNBC's Catherine Boyle