Oil retreats from multi-month highs ahead of Fed decision

By Robert Harvey

LONDON (Reuters) - Oil prices edged lower on Wednesday after hitting multi-month highs in the previous session, as investors braced for the U.S. Federal Reserve's interest rate policy announcement later in the day.

Brent crude futures for May fell 62 cents, or 0.71%, to $86.76 a barrel by 1028 GMT. U.S. West Texas Intermediate futures for April delivery, which expire on Wednesday's settlement, fell 71 cents, or 0.85%, to $82.76 a barrel. The more active May WTI contract was at $82.11 a barrel, down 62 cents, or 0.75%.

Investors are looking ahead to the Federal Reserve's announcement later on Wednesday for signs of its interest rate path for the rest of the year.

The Fed is not predicted to cut borrowing costs, but fresh economic projections could signal fewer interest rate cuts and a later start to the policy easing than previously expected.

The U.S. dollar index edged higher ahead of the Fed decision, which can also dent oil demand for buyers in countries using other currencies.

"Profit-taking could be a reason for the downside movement today," Auckland-based independent analyst Tina Teng said, adding that the recent price rally has been supported by improving demand outlook and signs of supply reduction.

Brent had settled at its highest since Oct. 31 in the previous session, at $87.38 a barrel, while WTI hit its highest since Oct. 27 at $83.47.

Ukrainian attacks on Russian refining assets have helped propel crude prices higher, as market participants assessed the impact on crude and fuel supply balances.

"If these disruptions are prolonged, it could eventually force Russian producers to reduce supply if they are unable to export all of this crude oil," ING analyst Warren Patterson said.

Investors will also be looking ahead to official stockpile data from the U.S. Energy Information Administration is at 1430 GMT on Wednesday. [EIA/S]

The American Petroleum Institute reported U.S. crude oil and gasoline stockpiles fell last week, while distillate inventories rose, according to sources. [API/S]

(Reporting by Robert Harvey, Florence Tan in Singapore and Shariq Khan in New York; Editing by David Evans)