© Reuters. FILE PHOTO: A view shows oil pump jacks outside Almetyevsk in the Republic of Tatarstan, Russia June 4, 2023. REUTERS/Alexander Manzyuk//File Photo

By Alex Lawler

LONDON (Reuters) -Oil rallied on Wednesday after an industry report of a larger-than-expected drop in inventories suggested robust demand and helped offset worries over further interest rate hikes.

Crude stocks fell by about 2.4 million barrels, market sources said, citing data from industry group American Petroleum Institute (API) ahead of official data from the Energy Information Administration at 1430 GMT.

was up 48 cents, or 0.7%, to $72.74 a barrel at 0928 GMT, while West Texas Intermediate (WTI) U.S. crude gained 31 cents, or 0.5%, to $68.01.

“This morning relief comes from last night’s API stats,” said Tamas Varga of oil broker PVM.

While outright prices gained, the discount of the prompt Brent contract to the next month has deepened, a structure called contango which indicates ample supply.

Brent is down about 15% this year as rising interest rates hit investor appetite, while China’s economic recovery has faltered after several months of softer-than-expected consumption and other data.

“For now, the market remains stuck with demand concerns weighing,” said Ole Hansen, head of commodity strategy at Saxo Bank. “OPEC production cuts have helped prevent a deeper setback.”

“Overall, the commodity sector, including crude oil, is suffering from risk adversity amid China growth worries and U.S. data strength pointing to higher rates,” he said.

European Central Bank President Christine Lagarde said on Tuesday stubbornly high inflation will require the bank to avoid declaring an end to rate hikes.

A rise in U.S. consumer confidence in June also led to market concerns that the Federal Reserve would likely have to continue raising interest rates.

Still, some analysts expect the market to tighten in the second half of 2023 partly due to ongoing OPEC+ supply cuts and Saudi Arabia’s voluntary reduction for July.