UPDATE 7-Oil rallies after 10th straight fall in U.S. inventories

* U.S. crude inventories up 1.1 mln bbls -EIA

* Refining runs dip, production hits 9.9 mln bpd -EIA

* Brent, U.S. crude futures hit highest since Dec 2014

* Options activity shows rising downside protection (New throughout, updates prices, market activity and comments, adds U.S. inventory figures; new byline, changes dateline, previous LONDON)

NEW YORK, Jan 24 (Reuters) - Oil prices rose on Wednesday, boosted by a record 10th straight weekly decline in U.S. crude inventories, though reduced refining activity and rising production signalled U.S. stocks should rise in coming weeks.

Overall crude inventories fell by 1.1 million barrels, short of expectations, but the 10-week streak of declines represents a record, according to U.S. Energy Information Administration (EIA) data going back to 1982. A weaker dollar also supported oil prices.

U.S. inventories fell to 411.6 million barrels, the lowest since February 2015. The steady draw has triggered record buying by speculators, pushing oil benchmarks to three-year highs.

U.S. West Texas Intermediate (WTI) futures were up 82 cents at $65.28, highest since December 2014, as of 11:09 a.m. EST (1609 GMT). Brent futures rose 29 cents to $70.26 a barrel, the highest since December 2014.

"The market has rallied by 50 percent and a lot of investors have been involved for a long time," said Saxo Bank senior manager Ole Hansen.

U.S. production rose to 9.9 million barrels a day, nearing the all-time record of 10.04 million bpd set in 1970.

Refining capacity use declined by 2.1 percentage points as maintenance season began, though gasoline and diesel demand still exceeded year-ago levels.

"It is only a matter of weeks until lower crude oil processing and rising domestic production lead to crude stock builds," said Carsten Fritsch, oil analyst at Commerzbank AG in Frankfurt, Germany.

Money managers hold more bullish positions in crude futures and options than at any time on record, encouraged by falling global inventories after production cuts by the Organization of the Petroleum Exporting Countries, Russia and others.

Some investors now appear to be seeking protection against a possible fall in prices. Trading data shows open interest for Brent put options for selling at $70, $69 and $68 a barrel has climbed since the middle of last week.

Sukrit Vijayakar of energy consultancy Trifecta said rising sell options are a result of large long positions built in previous months.

"We still have ... nine long barrels for every short barrel, so a reversal should be interesting to watch," he said.

However, traders said oil prices were unlikely to fall far because strong global economic growth has boosted oil demand while supply has been restraint by the OPEC-led deal to limit production.

Also supporting oil prices was a 0.7 percent drop in the U.S. dollar after Treasury Secretary Steven Mnuchin's comments that a weaker currency was positive for American trade.

A weaker dollar makes oil and other dollar-denominated commodities less expensive for investors using other currencies.

(Additional reporting by Amanda Cooper and Henning Gloystein; Editing by Edmund Blair and David Goodman)