Oil Rig Irion County US
A rig contracted by Apache Corp drills a horizontal well in a search for oil and natural gas in the Permian Basin in West Texas.Reuters

Benchmark US crude oil futures traded near their lowest level in four weeks amid speculation that the US Federal Reserve could further reduce its monetary stimulus on the back of an improving US economy.

The February West Texas Intermediate (WTI) contract traded 13 cents lower to $95.31 on the New York Mercantile Exchange at 06:17GMT.

Futures remained little changed after dropping 3% on 2 January, their biggest drop since 7 November, amid a stronger US dollar.

The Bloomberg Dollar Index, which tracks the greenback against 10 major currencies, remained little changed after gaining 0.3% on 2 January.

Elsewhere, the February Brent contract traded 15 cents, or 0.1%, higher to $107.93 a barrel on London's ICE Futures Europe exchange. The European benchmark was at a premium of $12.62 to the WTI.

Traders are contemplating the future pace of the Fed's bond buying stimulus after data released on 2 January showed that US factory activity expanded and jobless claims fell.

Meanwhile, crude stockpiles are forecast to have declined for the fourth time in five weeks, according to a Bloomberg survey ahead of data from the Energy Information Administration (EIA).

A reduction in crude inventory would suggest that oil demand in the US, the world's largest consumer of the commodity, is improving.

EIA Data

EIA data, due later in the day, is expected to show that crude oil stockpiles fell by 2.83 million barrels to 364.7 million last week, according to a Bloomberg poll of eight analysts.

"It's a reaction by the market to the surge in the US dollar due to the tapering expectation that really caused WTI to plunge" on 2 December, said Victor Shum, a vice president at IHS Energy Insight in Singapore.

"Weaker currencies for consuming countries make oil look expensive, that's why there is an inverse relationship between the move in the US dollar and moves in oil futures," Shum told the news agency.

Danske Bank said in a note to clients: "Oil prices have started 2014 heading south following news out of Libya of progress in the dispute between the government and regional protesters."

"The price on Brent Crude oil dropped more than $1.5/bl following an announcement that the [El] Sharara oil field will restart production."

"A further normalisation in the situation in Libya could send oil prices further down," the Danish bank added.

Capital Economics said in a note to clients: "The tiny fall in the [Institute for Supply Management's] manufacturing index in December did little to dampen the usual New Year optimism as the survey remains consistent with annualised [US] GDP growth of a healthy 3%."

"Overall, [recent] data releases provide yet more evidence that the [American] economy had a decent amount of momentum heading into the new year. And in contrast to the previous four years, we expect this momentum will be sustained throughout 2014."

The WTI contract lost $2.98 to $95.44 a barrel on 2 January, the lowest since 2 December. The volume of all contracts traded remained little changed from the 100-day average. Prices have dropped 5% this week, the most since September 2012, after gaining 1% last week.

US Recovery

The Labor Department reported that the number of people claiming government-sponsored unemployment benefits fell by 2,000 to 339,000 last week.

Manufacturing in the US expanded in December at the second-fastest pace in over two years, according to data released on 2 December. The ISM factory index eased to 57, from November's 57.3, which was the highest reading since April 2011.

On 18 December, outgoing Fed chief Ben Bernanke said the world's most powerful central bank would trim its asset buys owing to "cumulative progress and an improved outlook for the job market."

The Fed will cut its monthly bond buying by $10bn to $75bn starting this month.