(Reuters) - Brent crude steadied near $106 a barrel on Thursday as investors looked to Europe for policy easing measures after the U.S. Federal Reserve dashed their hopes by deferring fresh monetary stimulus.
Investors expecting immediate stimulus measures from the United States, the world's top oil consumer, were disappointed after the Fed held off from providing more help to the economy, although it kept the door open for further bond buying, also known as quantitative easing (QE).
"QE3 is much more significant than a rate cut, because it requires the expansion of the Fed's balance sheet. As such, the barrier to implementing QE3 is higher, and the economic data will need to be dire, before the FOMC is likely to act," Jason Schenker, president of Prestige Economics, said in a note.
The European Central Bank (ECB), which meets later in the day, is now carrying the burden of the market's hopes, with investors anxiously waiting to see if bank President Mario Draghi will back up his vow to do whatever it takes to protect the euro with serious action.
Brent crude edged up 7 cents to $106.03 per barrel by 0623 GMT, while U.S. crude inched down 2 cents to $88.89 per barrel.
Oil prices drew support from a U.S. Energy Information Administration report that showed a drop of 6.5 million barrels in domestic crude oil inventories last week, the largest weekly drawdown since December and far more than the 700,000-barrel drawdown forecast in a Reuters poll.
"Right now there are a few supportive factors in the market which are providing strength to oil: North Sea maintenance is heavier than normal, loss of Iranian barrels and emerging demand from refiners," said Jim Ritterbusch, president of Ritterbusch & Associates in Galena, Illinois.
"This will attract more speculative length and will keep prices elevated."
News that maintenance work in the UK North Sea will cut output in September of grades which make up the Brent benchmark for international trade are supporting prices, boosting Brent's premium against U.S. crude to $17.53 in the previous session -- its highest since May 16.
The U.S. Congress overwhelmingly passed a new package of sanctions against Iran on Wednesday that aims to punish banks, insurance companies and shippers that help Tehran sell its oil.
The bill now heads to the White House for President Barack Obama's signature. The United States, European Union, and other Western nations are trying to stop Iran's suspected pursuit of nuclear weapons, while Iran says its nuclear program is for peaceful purposes.
MARKET EYES ECB
Investors are now focusing on the ECB policy meeting, with expectations for bold actions after Draghi's pledge last week.
Spanish bond yields continue to trade at unsustainably high levels, which has Europe on edge that Madrid will require a bailout. Spain, the euro zone's fourth largest economy, lies at the centre of the bloc's debt crisis, as it struggles with a second recession in three years, record unemployment and soaring bills from its regions and banks.
"We now expect at least a 25 basis point rate cut at the meeting," said Schenker from Prestige Economics. "Anything less could send the dollar sharply higher, commodity prices lower, and could also push equities lower as well."
But others were not as optimistic.
"I don't think the market is going to get the kind of proclamations from the ECB that it wants, the fundamental issues in Europe are going to take time to work through," Ritterbusch said.
(Editing by Himani Sarkar)