SINGAPORE: Brent crude was steady under $96 a barrel on Wednesday, but prices stayed close to 17-month lows hit in the previous session as worries over Spain's high borrowing costs lingered ahead of the outcome of the US Federal Reserve's policy meeting.

Oil hit multi-month lows this week on concerns that Spain's soaring bond yields could eventually lead to an international bailout for Madrid, but investors hope any further monetary easing by the US central bank will boost liquidity and support prices.

Brent crude has already lost more than a quarter since peaking this year at $128.40 on March 1 as investors focused on the dimming outlook for global fuel demand rather than supply disruption risks posed by sanctions on key producer Iran over its disputed nuclear programme.

Brent oil for August delivery was up 11 cents at $95.87 per barrel by 0618 GMT. It fell as low as $95.40 earlier, near Tuesday's trough of $94.44 - its lowest since Jan. 10, 2011.

US July crude, which expires on Wednesday, was up 3 cents at $83.90 per barrel.

“The focus is still very much on Spain and Spanish bond yields. The levels they're currently at are just unsustainable,” said Ric Spooner of CMC Markets.

“For the short term, the market is trying to price in the risk of contagion.”

Spain moved closer to becoming the largest euro zone country yet to be shut out of credit markets after paying a euro era record price to sell short-term debt, with yields on longer-term bonds also at unsustainable levels at above 7 per cent.

Investors were gearing up for the possibility of the Fed launching more stimulus measures to revive the world's top economy given a recent spate of dismal data, including last month's poor US jobs numbers.

“We have seen a clear weakening in the US economy. The strong employment numbers we'd seen earlier look to have been seasonal, so (the Fed) is going to have to look at doing something to improve jobs growth,” Spooner said.

“The question is will they act now or hold off and use their firepower if or when the euro crisis gets worse?”

Besides action by the US central bank, some investors were anticipating action from the Bank of England and the European Central Bank.

“We expect the ECB to cut interest rates in July and either start buying bonds again or launch another long term refinancing operation if Spanish and Italian bond yields fail to rally,” Rupert Watson, Head of Asset Allocation, Skandia Investment Group, said in a note to clients.

“We also expect the Fed to provide more monetary stimulus and for the Chinese to cut interest rates. Finally, the Bank of England could announce a new round of quantitative easing.”

The US central bank will release a policy statement at the end of its two-day meeting later on Wednesday, followed by a briefing by Chairman Ben Bernanke at 1815 GMT.

IRAN TALKS

Brent crude ended lower on Tuesday on relief that negotiations in Moscow to defuse the dispute over Iran's nuclear programme led to plans for technical talks to be held in Istanbul on July 3.

A deal had not been widely expected and although experts said the sides were far apart, they welcomed the fact talks had at least not broken down completely.

If talks do eventually collapse, financial markets could be hit by fears of war and of higher oil prices because Israel has threatened to attack Iranian nuclear sites if diplomacy fails to stop Tehran getting the nuclear bomb, something the Islamic Republic denies it is seeking.

The market is awaiting an inventory report from the US Energy Information Administration later in the day for trading cues. Oil prices could be supported by a projected drop in US crude oil stockpiles for a third straight week.

On average, crude stocks are forecast to have dipped 1.1 million barrels in the week to June 15, according to a Reuters survey of 12 analysts.

The American Petroleum Institute on Tuesday said domestic crude stocks fell by 550,000 barrels last week, with crude imports down 82,000 barrels per day.