Oil Rallies Amid Talk of More Fed Easing

Oil prices staged a sharp turnaround ahead of the close in floor trading at the NYMEX Wednesday, as traders speculated about the prospects for more Fed easing.

Tracking the rally in U.S. equities and metals, oil prices—which had been lower most of the day—gained about one percent to settle at session highs.

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"There's a lot of talk about QE3 and that's driving stimulus hopes ahead of next week's Fed meeting," says Tradition Energy broker and analyst Gene McGillan. "It looks like markets want to rally."

Quantitative easing, or QE, entails the Fed's purchase of fixed income assets in an effort to drive investors into riskier assets, while at the same time keeping interest rates low. The Fed meets next week, and while most traders think it will not announce a new program at that July 31 meeting, there has been market speculation it may act.

After falling on bearish data on U.S. petroleum supplies, WTI oil prices rose nearly $2 from session lows to settle near $89 a barrel. September NYMEX WTI oil futures climbed from a intraday low of $86.84 to settle at $88.97 a barrel, Oil prices continue to rally in electronic trading.

Brent Crude futures lead the oil rally, rising to over $104.50 a barrel, and also continue to gain more ground in electronic trading.

"I was shocked. It's really surprising to see oil rally this hard from the low, especially considering the bearish news on inventories," says broker Michael McPartland of McNamara Options. "Gasoline demand is at levels not seen since 2000, plus we had big builds in oil and gasoline inventories."

The U.S. Energy Information Administration reported crude supplies increased by 2.7 million barrels in the past week and gasoline inventories rose 4.1 million barrels. Gasoline demand in the past week fell over 3 percent compared to the same week a year ago, the EIA reported.

Other traders say this afternoon's rise in crude oil futures was simply part of a broader commodity rally that took gold pricesto a two-week high above $1600, silver up 2 percent, copper and platinum up over 1 percent and nearly erased this week's losses in grains. Corn, wheat and soybeans are up 2 to 3 percent this session.

"Risk is back on in this summer trading session," says trader John Netto of M3 Capital.

"We had a technical bounce, but the preponderance of negative economic data may continue to weigh on the markets as we head into the biggest economic data release of the week (second quarter U.S. gross domestic product) on Friday," Netto said.

The prospect of military conflict overIran's nuclear program,on one hand, versus the deteriorating global economic outlook are divergent factors that have heightened recent volatility in the oil market, pushing oil prices to their highest level since May last Thursday.

But then as the focus in markets around the world turned to Spain and Italy's regional finances as well as the growing possibility of Greece exiting the euro zone, crude oil turned south.

-By CNBC's Sharon Epperson
Follow Sharon on Twitter: @sharon_epperson