Oil drops below $87 as U.S. GDP and Fed boost dollar

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crude oil slipped below $87 a barrel on Thursday as expectations that U.S. interest rates may rise sooner than previously thought pushed the dollar to its highest in more than three weeks.

A 3.5 percent annual rise in third-quarter U.S. gross domestic product reported on Thursday came a day after the U.S. central bank gave a surprisingly upbeat assessment of the economy, reinforcing a more hawkish rate outlook.

While faster growth in the world's biggest consumer of oil boosts the outlook for demand, a stronger greenback makes dollar-priced commodities such as oil more expensive for buyers using other currencies.

"Increased expectations about a first increase in rates next year will be dollar positive and a higher dollar will be generally negative for commodities," said Olivier Jakob, energy market analyst at consultancy Petromatrix in Zug, Switzerland.

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Brent crude for December fell 97 cents to $86.15 a barrel in mid-morning trade. U.S. crude fell $1.24 cents to $80.96.

Both benchmarks climbed on Wednesday after data showed U.S. crude oil stockpiles rose 2.1 million barrels last week, less than the 3.4-million-barrel increase expected and offering some relief for a market hit hard by a supply glut.

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Carsten Fritsch, senior oil analyst at Commerzbank in Frankfurt, said he was surprised oil prices had not fallen further on Thursday, given the strength of the dollar.

"All commodities are under pressure," Fritsch said. "We should see a move back down towards the lows of the early part of the week."

Brent touched a low of $84.55 on Monday. It dropped to $82.60 on Oct. 16, its lowest in almost four years, weighed down by brimming inventories worldwide.

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A 25 percent slide in oil prices from June had raised suggestions that the Organization of the Petroleum Exporting Countries would curb output. But some OPEC members have not warmed to the idea of cutting production.

OPEC Secretary-General Abdullah al-Badri said on Wednesday there was not likely to be a big change in OPEC's oil output next year.