Oil falls as rate hike fears outweigh tighter U.S. stockpiles

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By Laila Kearney

NEW YORK (Reuters) -Oil fell by more than $1 a barrel on Thursday in choppy trade as the impact of tighter U.S. crude stocks due to a winter storm in the United States was outweighed by fears that Federal Reserve interest rate hikes and China's rising COVID-19 cases would dent demand.

Brent crude futures were down $1.41, or 1.7%, to $80.79 by 1 p.m. EST (1800 GMT), after gaining around 2.7% from the previous session. U.S. West Texas Intermediate (WTI) crude futures fell $1.18, or 1.5%, to $77.11 a barrel.

Oil gave up its daily gains after the release of U.S. economic data showed the number of people filing new claims for unemployment benefits increased less than expected last week and the economy rebounded faster than previously estimated in the third quarter. The rosy data increased concerns the Fed would become more likely to intensify its rate hikes in a move that could slow the economy and hamper fuel consumption.

"That started to ruin the momentum because of fears the Fed would be back chopping down the market again," said Phil Flynn, an analyst at Price Futures Group in Chicago.

At the same time, airlines cancelled nearly 2,000 U.S. flights scheduled for Thursday and Friday, disrupting holiday travel for thousands and sending a bearish signal for travel fuel demand.

Also keeping a lid on prices are demand worries stemming from China's COVID-19 surge.

China may be struggling to keep an accurate count of COVID-19 infections as it experiences a big spike in cases, a senior World Health Organization official said on Wednesday, amid concerns about a lack of data from the country.

A Shanghai hospital has told its staff to prepare for a "tragic battle" with COVID-19 as it expects half of the city's 25 million people will get infected by the end of next week, as the virus sweeps through China largely unchecked.

Both benchmark oil contracts jumped on Wednesday after government data showed U.S. crude inventories fell by much more than analysts had expected, posting a drop of 5.89 million barrels for the week ending Dec. 16. [EIA/S]

Distillate stocks, which include heating oil and jet fuel, also declined, going against expectations for a build, in what PVM analyst Stephen Brennock called "an overwhelmingly price-supportive stock report from the EIA."

Stockpiles fell as demand for heating oil was set to soar because of a powerful winter storm hitting the United States, with sub-zero wind chills expected as far south as Texas and record-breaking lows forecast for Florida.