By Luke Pachymuthu
SINGAPORE (Reuters) - Brent crude steadied around three-month highs on Thursday, supported by expectations the Federal Reserve will keep its stimulus programme to aid the U.S. economy, while a sharp decline in crude inventories lifted U.S. oil to near 16-month peaks.
West Texas Intermediate crude has narrowed its price gap with Brent to the smallest since December 2010 after U.S. data showed the biggest two-week decline on record in crude stockpiles, reflecting strong demand in the world's top oil consumer.
Oil prices were supported by the dollar's slump after minutes of the Federal Reserve's June meeting showed many of its policymakers wanted more signs the U.S. job market is improving before cutting bond purchases.
Fed Chairman Ben Bernanke also said the U.S. central bank would continue to pursue an accommodative monetary policy for now given tame inflation and a still fragile labour market.
But given recent sharp gains, price movements in crude were limited on Thursday. Other commodities including gold and copper jumped about 2 percent.
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"Previously there was an anticipation that we would see a tapering of stimulus at the end of the summer, so that spooked traders and we saw that steep drop in June," said Carl Larry, president of Houston-based consultancy Oil Outlooks and Opinions LLC.
"Now that we know it's going to start sometime at the end of the year, it gives the economy some room to grow a little more, and for that unemployment number to get down to around 7 percent, which is going to be good for oil demand growth here."
Brent crude for August delivery was little changed at $108.45 a barrel by 0137 GMT after settling at $108.51 on Wednesday when it touched a three-month top of $108.69.
U.S. crude was off 4 cents at $106.48 a barrel, after peaking at $106.95 earlier, its highest since March 2012. The front-month contract jumped nearly 3 percent in the previous session, its biggest daily rise since May.
The gap between global benchmark Brent and the U.S. benchmark narrowed to $1.67.
Data from the Energy Information Administration on Wednesday showed that U.S. oil stocks fell about 10 million barrels for a second consecutive week, while refinery demand was at its strongest in six years.
"We are finally seeing oil demand catch up with the economic recovery in the U.S., this is putting upward momentum on oil prices," said Larry.
The Organization of the Petroleum Exporting Countries expects a stronger economy to boost world oil demand by 1 million barrels per day in 2014, the highest growth since 2010.
(Editing by Manolo Serapio Jr. and Joseph Radford)