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Oil prices fell about 2% on Monday, hit by investor concerns over the possibility of quicker than expected interest-rate hikes by the U.S. Federal Reserve that took down risk markets such as equities while the dollar rallied.

Wall Street stocks slumped, after last week posting their worst week since 2020, pulling down other risk assets like crude. [MKTS/GLOB]

“Everything is being taken out to the wood shed and the wood shed is a pretty crowded place,” said John Kilduff, a partner at Again Capital Management.

Brent crude fell $1.8, or 2.09%, to $86.05 a barrel by 1:29 p.m. EST (1705 GMT), while U.S. West Texas Intermediate (WTI) crude dropped $1.96 or 2.3%, to $83.17.

Both benchmarks rose for a fifth week in a row last week, gaining about 2% to reach their highest since October 2014.

“With the stock market falling out of bed, we’re getting into a risk-off situation,” said Phil Flynn, analyst at Price Futures Group in Chicago.

“Big picture, we believe oil is going higher over the long run, but short-term we’ve gotten overbought and juiced up on geopolitical risk,” said Flynn.

Oil prices are up more than 10% this year on the concerns over tightening supplies and OPEC+ now struggling to hit a targeted monthly output increase of 400,000 barrels per day.

The swift rise in crude left it open for a correction, analysts said. Stocks fell while the dollar rose to a two-week high on Monday against a basket of currencies, lifted by the tension between Russia and the West over Ukraine and the possibility of a more hawkish stance from the Fed this week.

Tensions in Ukraine have been increasing for months after Russia massed troops near its borders, fuelling fears of supply disruption in Eastern Europe.

In the Middle East, the United Arab Emirates intercepted and destroyed two Houthi ballistic missiles targeting the Gulf country on Monday after a deadly attack a week earlier.

Further escalation of the situation in both Ukraine and the Middle East “justify a risk premium on the oil price because the countries involved – Russia and the UAE – are important members of OPEC+”, said Commerzbank analyst Carsten Fritsch.

U.S. crude stocks decreased by about 400,000 barrels in the week to Jan. 21, a Reuters poll showed.

Chiefs of major U.S. oil companies Occidental Petroleum Corp and ConocoPhillips offered differing outlooks on the growth of U.S. oil output at a conference Monday.

ConocoPhillips CEO Ryan Lance said he was bullish about markets as high oil prices “will persist for a while”, whereas Occidental CEO Vicki Hollub forecast U.S. production to grow, but fall short of its all-time record.

Barclays raised its average oil price forecasts by $5 a barrel for this year, citing shrinking spare capacity and elevated political risks.

“For all the hoopla around $100 a barrel oil, there are still questions about the economy which is being discounted to a degree and we are getting a reality check today,” Kilduff added.

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