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Oil down amid questions on Fed's policy direction

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The Associated Press | August 21, 2013 05:28 PM EST | AP

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NEW YORK — The price of oil fell Wednesday as the Federal Reserve indicated it will slow a bond-buying program that has suppressed long-term interest rates by the end of the year.

Benchmark oil for October delivery dropped $1.26 to close at $103.85 a barrel on the New York Mercantile Exchange.

The Federal Reserve released the minutes of its policy meeting from July 30-31. The Fed appears on track to cut back on its $85 billion a month of asset purchases by the end of this year if the economy continues to improve. But it remains divided over the exact timing of the move.

The Fed's stimulus policy has lowered interest rates and made oil and other commodities a more attractive investment by offering potentially higher returns. Many analysts think the tapering could weigh on oil prices.

Meanwhile, the Energy Department reported that crude oil supplies fell by 1.4 million barrels and gasoline stocks dropped by 4 million barrels in the week ended Aug. 16. Both declines were larger than analysts expected. Gasoline futures rose 1 cent to $2.94 a gallon.

Brent crude, which is used to set prices for imported oil used by many U.S. refineries, fell 34 cents to $109.81 a barrel on the ICE Futures exchange in London.

The crisis in Egypt has kept the price of Brent from falling too far. Egypt controls the Suez Canal, which is a key transport route for oil and other goods in the Middle East. While analysts expect the channel to remain open, a risk premium and higher insurance costs are seen being added to the oil price.

The next move for oil could depend on China manufacturing data, scheduled for release Thursday.

"While it is too early to close the door on a return to the $108 area, we are also not able to rule out some additional price slippage unless China comes to the rescue with a better than expected manufacturing number," said Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates, in a note to clients.

Reports of labor conflicts at key Libyan ports used to export oil have also supported oil prices.

In other energy futures trading on Nymex:

_ Heating oil was flat at $3.08 per gallon.

_ Natural gas rose 2 cents to $3.46 per 1,000 cubic feet.

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Pamela Sampson in Bangkok and Pablo Gorondi in Budapest contributed to this report.