By Mohi Narayan

NEW DELHI (Reuters) -Oil prices dropped on Wednesday after U.S. fuel stockpiles climbed, indicating declining demand in the world's biggest oil consumer amid a massive spike in COVID-19 cases caused by the Omicron variant.

Brent crude futures fell 9 cents, or 0.11%, to $79.91 a barrel at 0537 GMT, while U.S. West Texas Intermediate (WTI) crude futures fell 13 cents, or 0.17%, to $76.86 a barrel.

U.S. gasoline stockpiles rose by 7.1 million barrels in the week to Dec. 31, the American Petroleum Institute (API) reported late on Tuesday. Distillate stockpiles climbed by 4.4 million barrels in the week. [API/S]

The surging stockpiles, which exceeded analysts' expectations, undermined the bullish outlook from investors during the previous session when price climbed more than 1% as market participants took the decision of major producers to add supply next month as a sign of confidence that surging COVID-19 cases would not hit demand for long.

"Rising U.S. production as more and more producers find it lucrative to return to the well pad is weighing on oil prices," Sugandha Sachdeva, vice president of commodities research at Religare Broking said.

Meanwhile, the Organization of the Petroleum Exporting Countries, Russia and allies, together called OPEC+, on Tuesday agreed to add another 400,000 barrels per day of supply in February, as it has every month since August.

The decision to stick their output increase reflected the group's view that Omicron will only have a short-lived impact on global energy demand.

"Two consecutive days of strong gains have put crude in over-bought territory," said Vandana Hari, founder of Vanda (NASDAQ:VNDA) Insights, provider of oil market analysis.

Market sentiment will continue to see-saw, Hari said.

One the one hand, there may be growing hope that the Omicron variant may herald COVID-19's shift from pandemic to a more easily manageable disease, at least in the highly vaccinated parts of the world.

But on the other, prices may be hit by a sobering realisation that countries remain on high alert, and governments are not ready to relax restrictions as long as infections are spiking.