By Arathy Somasekhar
HOUSTON(Reuters) - Oil prices fell 1.5% on Wednesday after the U.S. Federal Reserve projected more interest rate hikes this year, worrying markets about demand just hours after government data showed an unexpected, large build in U.S. crude oil stocks.
Brent crude futures settled $1.09, or 1.5%, lower at $73.20 a barrel, while U.S. West Texas Intermediate (WTI) crude closed $1.15, or 1.7%, lower at $68.27.
Both benchmarks had climbed more than 1.5% earlier in the session. They rose more than 3% the previous day on expectations of rising fuel demand after China's central bank lowered a short-term lending rate.
The Federal Reserve left interest rates unchanged but signalled in new economic projections that borrowing costs will likely rise by another half percentage point by the end of this year as it reacts to a stronger-than-expected economy and a slower decline in inflation.
"Markets fear that a higher interest rate environment is going to lower oil demand. The knee jerk reaction is pushing oil down," said Price Group analyst Phil Flynn.
Higher interest rates strengthen the dollar, making commodities denominated in the U.S. currency more expensive for holders of other currencies.
Wall Street stocks fell, while gold prices pared gains after the Fed's decision and comments.
U.S. crude oil stocks rose by about 8 million barrels in the week ended June 9, according to data from the Energy Information Administration. Analysts had estimated a 500,000-barrel decline.
Gasoline and diesel stocks also rose more than expected. [EIA/D]
The IEA, meanwhile, increased its oil demand growth forecast for this year by 200,000 barrels per day (bpd) to 2.4 million bpd, lifting the projected total to 102.3 million bpd.
However, the agency expects economic headwinds to reduce growth to 860,000 bpd next year and increasing use of electric vehicles to help to reduce that to 400,000 bpd in 2028 for overall demand of 105.7 million bpd.
The IEA's 2023 oil demand growth figure is slightly above that of the Organization of the Petroleum Exporting Countries (OPEC).
JPMorgan (NYSE:JPM) downgraded its forecast for this year's average Brent crude price by $9 to $81 a barrel.