Oil falls 2% as U.S. dollar strengthens on Fed rate hike expectations

NEW YORK, April 19 (Reuters) - Oil prices slid about 2% to a two-week low on Wednesday despite a sharp decline in U.S. crude inventories, as the U.S. dollar strengthened on fears that looming U.S. Federal Reserve interest rate hikes could curb energy demand in the world's top consumer.

A stronger dollar can hurt global demand for oil by making it more expensive in other countries. Investors were also discouraged by still high inflation in Europe and uneven economic data in China, the world's biggest crude importer.

Brent futures fell $1.23, or 1.5%, to $83.54 a barrel by 1:45 p.m. EDT (1745 GMT), while U.S. West Texas Intermediate (WTI) crude fell $1.23, or 1.5%, to $79.63.

That put both WTI and Brent on track for their lowest closes since March 31, erasing most of the price gains since the surprise oil output cut announced on April 2 by the Organization of the Petroleum Exporting Countries, Russia and other allies in the OPEC+ group.

"The crude benchmarks are posting ... lows ... in response to a strengthening in the U.S. dollar that is, in turn, weighing on risky assets following some hot inflation data out of Europe," analysts at energy consulting firm Ritterbusch and Associates told customers in a note.

"We still believe that the market has been too focused on the supply side of the global oil equation following the OPEC output cuts and that world oil demand is significantly weaker than widely perceived," the note said.

U.S. crude stockpiles fell by a bigger-than-expected 4.6 million barrels last week as refinery runs and exports rose, while gasoline inventories jumped unexpectedly on disappointing demand, according to the U.S. Energy Information Administration (EIA).

That is a much bigger crude withdrawal than the 1.1-million barrel decline analysts forecast in a Reuters poll and the 2.7-million barrel decline reported by the American Petroleum Institute late Tuesday.

In China, stock markets closed lower due to uneven first-quarter data indicating a bumpy economic recovery after the country dropped its strict zero-COVID-19 policy.

Wall Street's main stock market indexes edged down on growing expectations that the Federal Reserve could keep interest rates higher for longer.

The Fed is likely to have one more interest rate rise in store, Atlanta Fed President Raphael Bostic said on Tuesday.

Markets are pricing in an 86% chance of the Fed raising rates by 25 basis points in May.

In Europe, European Central Bank officials remained wary of inflation and have suggested further rate hikes also.

Adding more pressure on oil benchmarks, Asian refiners have continued to snap up Russian crude in April. India and China have bought the vast majority of Russian oil so far in April at prices above the Western price cap of $60 a barrel, according to traders and Reuters calculations.

Oil loadings from Russia's western ports in April will rise to the highest since 2019, above 2.4 million barrels per day (bpd), despite Moscow's pledge to cut output, trading and shipping sources said.

In the U.S., meanwhile, heating oil futures were on track to close at their lowest since January 2022 for a second day in a row on low diesel demand. (Additional reporting by Ahmad Ghaddar in London and Muyu Xu in Singapore Editing by David Goodman, Kirsten Donovan and Sharon Singleton)