Wires

UPDATE 7-Oil falls 2% on surprise U.S. crude build, Trump's China trade comments

Laila Kearney

comments@

* Dollar recovers on safe-haven flows amid Trump impeachment probe

* U.S. crude stockpiles notch surprise weekly rise -EIA

* Trump's China rebuke undermines Sino-U.S. trade talks

* Saudi restored oil output capacity to 11.3 mln bpd-sources (Updates market activity, comments)

NEW YORK, Sept 25 (Reuters) - Oil prices dropped about 2% on Wednesday, logging a second straight day of losses after U.S. crude inventories unexpectedly rose and on worries that demand could fall after U.S. President Donald Trump's comments about trade talks with China.

A rally in the dollar, which moves inversely with oil, also weighed on oil as a Democratic-led chamber was launching an official presidential impeachment inquiry.

Brent crude futures shed $1.18, or 1.9%, to $61.92 a barrel by 12:06 p.m. EDT (1606 GMT), while U.S. West Texas Intermediate crude fell $1.09, or 1.9%, to $56.20 a barrel.

"The complex is seeing significant downside pressure today off further reduction in risk appetite related to lack of progress on the U.S.-China trade front as well as the impeachment inquiry that appears poised to reduce appeal for risky assets," said Jim Ritterbusch, president of Ritterbusch and Associates. "Adding to the mix was some bearish ... data featured by a counter seasonal U.S. crude build."

U.S. crude inventories unexpectedly rose 2.4 million barrels last week, the Energy Information Administration said, instead of declining 249,000 barrels as analysts forecast.

Trump said on Wednesday that a deal to end a nearly 15-month trade war with China could happen sooner than people think.

Global markets had weakened on Tuesday after Trump criticized China's trade practices at the United Nations General Assembly and said he would not accept a "bad deal" in U.S.-China trade negotiations.

China is the world's largest oil importer and is second-largest crude consumer after the United States.

Trump also said he saw a path to peace with Iran, cooling other risk premiums built into oil prices, particularly after the Sept. 14 attack on Saudi Arabia's oil facilities that halved its output. Both the kingdom and the United States have blamed Iran for the attack.

"The geopolitical risk premium has all but vanished and bullish catalysts suddenly appear in short supply across the oil market," said PVM analyst Stephen Brennock.

OCBC economist Howie Lee said prices could still receive a boost should buyers of Saudi crude have to look for supplies in the spot market if Saudi stocks ran out.

"The market is very concerned about the demand side of the equation, but I would caution against being complacent about what's happening in the Middle East," Lee said.

Commerzbank's Carsten Fritsch said the dip in prices was premature. "It is reasonable to doubt that Saudi Aramco has already made good the outages in the affected facilities almost completely," he said.

Sources told Reuters that Saudi Arabia has restored production capacity to 11.3 million barrels per day, a quicker recovery than expected.

(Additional reporting by Scott Disavino in New York, Shadia Nasralla in London and Florence Tan in Singapore; Editing by David Gregorio and Marguerita Choy)