Brent crude hovered below $107 per barrel on Wednesday ahead of the outcome of a U.S. Federal Reserve meeting and economic data that will be scoured for hints on the outlook for demand from the world's top oil consumer.
But prices were set to post their biggest monthly rise in eleven months, helped by gains earlier in July amid geopolitical tensions that kept alive concerns about global oil supplies.
"All eyes are on the Fed statement, and I think in terms of the short term trajectory for risk assets, that's going to be the focal point, followed by non-farm payrolls and other U.S. data," said Ben Le Brun, an analyst at OptionsXpress in Sydney.
"If there's any suggestion the Fed is going to taper the current bond buying program as soon as September, then that's U.S. dollar positive and therefore a negative impact on everything that's weighed in U.S. dollar."
The Fed, which will release its post-meeting statement at 1800 GMT, is expected to link the start of any tapering to data signals. There are two major U.S. reports lined up for this week -- the GDP data on Wednesday and non-farm payrolls on Friday.
Brent slipped 13 cents to $106.78 a barrel by 0520 GMT, but was on track for a monthly rise of 4.5 percent -- led by gains in the first half to a three-month peak on July 16.
U.S. crude rose 7 cents to $103.15 and was headed for a nearly 7 percent gain in July. Prices hit a 16-month top earlier in July. Both benchmarks are set to post their best monthly performance since August 2012.
"As speculative positioning was at record highs we are not surprised to see profit-taking, but it is always difficult to predict the timing. But with event-risk high this week, the market has taken the opportunity to reduce some net longs," ANZ analysts wrote in a note on Wednesday.
Investors were also awaiting manufacturing data later this week from China which could highlight weakness in the world's No. 2 oil consumer.
Activity in China's manufacturing sector may have contracted in July for the first time in 10 months, a Reuters poll showed, signalling a protracted slowdown in the world's second-largest economy as demand at home and abroad sags.
U.S. oil prices drew support from the American Petroleum Institute's report that showed commercial crude stockpiles fell for a fifth straight week. The drop of 740,000 barrels last week was, however, less than the 2.3 million barrels forecast in a Reuters poll.
Market participants are now waiting for the more closely-watched inventory report from the U.S. Energy Information Administration later in the day.
Supply risks remained as workers at Libya's largest oil refinery have gone on strike, following similar worker protests at the major crude oil terminals Ras Lanuf and Es Sider over the weekend. It was not immediately clear whether output had been completely halted.
Oil outages in Iraq, South Sudan, Libya and Iran are combining to help keep oil prices well above $100 a barrel, partly countering the rise in U.S. shale oil supply and worries about Chinese demand.