Crude oil storage tanks are seen from above at the Cushing oil hub in Cushing
Crude oil storage tanks are seen from above at the Cushing oil hub, in Cushing, Oklahoma, March 24, 2016. Reuters

Oil prices fell on Thursday after industry data showed a large unexpected increase in U.S. crude stocks for a second week, heightening concerns of a drop in fuel demand.

U.S. West Texas Intermediate (WTI) crude futures declined by 86 cents, or 1.1%, to $78.62 a barrel at 0109 GMT, while Brent crude futures fell 73 cents, or 0.9%, to $84.25 a barrel, extending losses of around 1% from Wednesday.

The market weakened on worries about a looming U.S. economic slump after Federal Reserve officials said rates needed to rise beyond 5% to control inflation even after data showed retail sales fell more than expected in December.

"This raised the spectre of a recession, with risk appetite suffering as a consequence," ANZ Research analysts said in a client note.

Adding to the pall, data from the American Petroleum Institute showed U.S. crude oil inventories rose by about 7.6 million barrels in the week ended Jan. 13, according to market sources.

Nine analysts polled by Reuters had estimated on average that crude inventories fell by about 600,000 barrels.

The big build marks the second consecutive week of large inventory increases.

On a bullish note, however, distillate stockpiles, which include diesel and heating oil, fell by about 1.8 million barrels against analysts' expectations for a 120,000-barrel increase.

The API report was delayed by a day due to Monday's Martin Luther King Day public holiday in the United States. The government's Energy Information Administration will release its weekly inventory report on Thursday.

With aggressive rate hikes still on the cards, the U.S. dollar climbed, further weighing on oil demand, as a stronger greenback makes the commodity more expensive for those holding other currencies.