Oil advanced to a six-month high of more than $85 a barrel on signs U.S. crude inventories are dropping and speculation stimulus measures by the Federal Reserve will weaken the dollar.

Crude stockpiles in the U.S., the world's biggest oil consumer, dropped 4.1 million barrels last week, the most since July, the industry-backed American Petroleum Institute said yesterday. The Energy Department will release its own report today. The Fed, wrapping up a two-day meeting today, may announce a plan to purchase at least $500 billion in long-term securities, according to economists surveyed by Bloomberg News.

"We can expect higher prices, maybe up to $90 or even higher," said Sintje Diek, an analyst with HSH Nordbank in Hamburg. "We've seen higher prices in the last days because of quantitative easing. This means higher inflows into riskier assets. But the fundamental picture hasn't changed. We're still oversupplied."

Oil for December delivery rose for a third day, gaining as much as $1.14, or 1.4 percent, to $85.04 a barrel on the New York Mercantile Exchange, the highest price since May 4. The contract was at $84.92 at 11:41 a.m. London time. Brent crude for December settlement was up $1.09, or 1.3 percent, at $86.50 a barrel after climbing as high as $86.63 a barrel on the ICE Futures Europe exchange in London.

The dollar has dropped more than 10 percent versus the euro since Aug. 27, when Fed Chairman Ben S. Bernanke said the central bank "will do all that it can" to sustain economic growth, fueling speculation that a resumption of asset purchases would debase the dollar.

Eoin Treacy's view The vast majority of globally significant stock markets have been in a bull market since the nadir of the credit crisis. One can argue whether this is a cyclical bull as in the case of the so called "developed markets" or a secular move for commodity producers and the world's rapidly progressing population centres. However, all share a sensitivity to rising government yields, a potential Dollar crisis and surging oil prices.

Government bond yields in the USA, core Eurozone, UK and Japan are probably bottoming but have a long way to go before they offer an impediment to growth. Additionally yield curve spreads remain at highly accommodative levels. The US Dollar has declined steeply over the last few months. However, the competitive devaluation being pursued by a large number of countries suggests that a continued managed decline for the Dollar remains the most likely prospect.

Oil prices have been ranging for much of the last year and hit $85 for the first time since May today. The extent of underlying trading should support further upside and a sustained move below $80 would be required to question potential for a move to new recovery highs.

I thought it might be instructive to view oil in a number of other currencies in order to gauge whether its recent strength is simply a result of Dollar weakness. To one extent or another, oil has ranged for the last year when quoted in just about every currency. It has drifted more against the Euro, Yen and Australian Dollar of late, but is firm against the Canadian Dollar and Pound and has broken upwards to new recovery highs against the New Zealand Dollar, Rand and Renminbi. The conclusion remains that demand is beginning to regain dominance.