By Ahmad Ghaddar

LONDON (Reuters) -Oil slipped on Thursday as an increase to U.S. interest rates pushed up the dollar and heightened fears of a global recession that would crimp fuel demand, though losses were capped by concern over tight supply.

Brent crude dropped by $1.39, or 1.5%, to $94.77 a barrel by 1358 GMT while U.S. West Texas Intermediate (WTI) crude futures fell $1.76, or 2%, to $88.24.

Both benchmarks had gained more than $1 on Wednesday, aided by another drop in U.S. oil inventories, even as the U.S. Federal Reserve boosted interest rates by 75 basis points and Chair Jerome Powell said it was premature to consider pausing rate increases. [EIA/S]

That sent the dollar higher on Thursday, with Powell indicating that U.S. rates are likely to peak above current investor expectations.

A strong dollar reduces demand for oil by making it more expensive for buyers using other currencies.

“Rising anxiety about stalling growth will inevitably impact global oil demand and another downward revision in the next set of forecasts is not a far-fetched idea,” said PVM Oil analyst Tamas Varga.

However, losses were capped by expectations that the oil market is set to tighten in the coming months.

Stephen Innes, managing partner of SPI Asset Management, said it was that surprising oil had proved so resilient after the move by the Fed, but he said that fundamentals have put a floor under prices.

The European Union’s embargo on Russian oil over its invasion of Ukraine is set to start on Dec. 5 and will be followed by a halt on oil product imports in February.

Lower output from the Organization of the Petroleum Exporting Countries (OPEC) also lent price support, with a Reuters survey finding that the producer group’s output fell in October for the first time since June.

OPEC pumped 29.71 million barrels per day (bpd) last month, the survey found, down 20,000 bpd from September, which was the highest output since April 2020.

The group produced 1.36 million bpd below targets for October.

OPEC and its allies including Russia, known collectively as OPEC+, also decided to cut targeted output by 2 million bpd from this month.

Another bullish factor is a potential pick-up in demand from China if Beijing eases its zero-COVID policies. Chinese policymakers pledged on Wednesday that growth was still a priority and they would press on with reforms.

(Reporting by Ahmad GhaddarAdditional reporting by Arpan Varghese and Muyu Xu in SingaporeEditing by David Goodman)