Oil slumps to 17-month low as stockpiles rise, Fed disappoints

* U.S. EIA data shows surprise build in crude stocks

* U.S. Federal Reserve extends Operation Twist (Updates market activity, adds details)

By Gene Ramos

NEW YORK, June 20 (Reuters) – World oil prices plunged more than 3 percent to their lowest in a year and a half o n W ednesday as data showed U.S. crude inventories unexpectedly swelled and the Federal Reserve offered only faint measures to aid the economy.

Oil, equities and other risky assets vacillated after the Fed statement, first falling on the absence of more aggressive easing measures before rallying on hope that an extension of Operation Twist — an effort to depress borrowing costs by selling short-term bonds to buy longer-dated ones — might help.

But within an hour most markets were back to their pre-Fed levels, with oil traders focusing on signs that the euro zone debt crisis and lackluster growth in the U.S. economy are exacerbating a growing surplus of stockpiled oil.

Brent crude for August delivery fell $2.21 to $93.55 a barrel by 2:15 p.m. EDT (1815 GMT), retracing some losses after touching a session low of $92.65 following the Fed announcement. That was the lowest level since January 2011.

“Some market participants were expecting QE3 (a third round of quantitative easing), and will be disappointed yet again,” said Jason Schenker at Prestige Economics in Austin, Texas

“The stimulus announced today is very modest.”

Weak demand and rising inventories have built up the supply cushion in the world’s biggest market to levels not seen since 1990. U.S. crude oil stockpiles rose last week by 2.86 million barrels, defying forecasts for a 1.1 million barrel decline. Earlier industry data had also showed a decline.

Despite the bearish news on U.S. supplies, the New York crude oil futures market continued to hold up better than European Brent, buoyed by expectations that a more than year-long glut of Midwestern crude is finally easing — even though Cushing stockpiles rose last week.

The U.S. July crude contract, which will expire at the close, fell $1.94 to $82.09 a barrel. The more actively traded August crude fell $1.99 to trade at $82.36. The August Brent/WTI spread rose 27 cents to $11.15 a barrel, the narrowest since January.

The new lows and the Fed news pumped up trading activity, with Brent volume 26 percent above its 30-day average, Reuters data showed. U.S. crude trade was just near its average.

BRIMMING U.S. STOCKPILES

Defying expectations, crude stocks at the U.S. delivery point in Cushing, Oklahoma, rose 360,000 barrels. Traders have been expecting stocks to begin to ease from record highs after the reversal last month of the Seaway pipeline, the first major conduit to pump oil from Cushing to the Gulf Coast.

Prices were also pressured as U.S. inventories of distillates and gasoline rose higher than expected, data from the U.S. Energy Information Administration also showed.

“It must be because investors are looking ahead and seeing that the situation in Europe isn’t going to get any better, while the outlook for demand in the U.S. is poor and China is slowing too,” said David Morrison, analyst at GFT Global. (Additional reporting by Matthew Robinson in New York; Simon Falush in London; Luke Pachymuthu in Singapore; Editing by Marguerita Choy)