By Barani Krishnan
NEW YORK (Reuters) - Oil prices retreated from 2016 highs and snapped a two-day rally on Wednesday, hurt by a surge in the dollar after the U.S. Federal Reserve signalled it could raise interest rates next month.
Brent and U.S. crude's West Texas Intermediate (WTI) futures had advanced closer to $50 a barrel on Wednesday after large gasoline and distillate drawdowns were announced by the U.S. Energy Information Administration (EIA).
But minutes from the Fed's April 26-27 policy meeting, released in late afternoon trading of oil, sent the dollar rallying against a basket of currencies and the crude benchmarks into negative territory.
The minutes showed the central bank was likely to raise rates in June if economic data pointed to stronger second-quarter growth and firmer inflation and employment.
"We think people really had a June rate hike off the table," said Tariq Zahir, crude trader and managing partner at Tyche Capital Advisors in New York. "But with the Fed disputing that, we could have a much stronger dollar from here, which is typically bearish for oil and other commodities."
Brent settled down 35 cents at $48.93 a barrel. Earlier, it came within 15 cents of striking the $50 target coveted by oil bulls. That session's peak of $49.85 was the highest for Brent since November.
WTI closed down 12 cents at $48.19 a barrel after reaching $48.95 - its highest level since mid-October.
U.S. gasoline stockpiles fell by 2.5 million barrels last week, versus a draw of 150,000 barrels expected by analysts in a Reuters poll.
Inventories of distillates, which include diesel and heating oil, slumped by 3.2 million barrels, versus expectations for a 642,000-barrel drop.
The draws took the market's attention from a crude build of 1.3 million barrels, which analysts said should have been bearish for crude prices. The Reuters poll forecast a decrease of 2.8 million barrels in crude stocks last week. Preliminary data on Tuesday from the American Petroleum Institute, a trade group, showed a crude draw of 1.1 million barrels.
Oil prices are up about 80 percent or more from 12-year lows of around $27 for Brent in January and about $26 for WTI in February. The rebound has been fuelled by declining U.S. crude output, a wildfire that has restricted Canadian oil exports to the United States and outages in Libyan and Nigerian supply.
Some analysts worry the higher prices will lead to more production and another major oil glut, similar to the kind that forced prices down from highs above $100 a barrel in mid-2014.
(Additional reporting by Ahmad Ghaddar in London and Henning Gloystein in Singapore; Editing by Marguerita Choy and Paul Simao)
