-- Oil prices fell sharply Wednesday, extending recent losses as an unexpected build in U.S. stockpiles and strong crude production sparked doubts over tight supply conditions ahead of the Fed meeting.

At 08:25 ET (12:25 GMT), fell 1.4% to $85.15 a barrel, while fell 1.6% to $80.61 a barrel, dropping to their lowest levels since mid-March.

U.S. inventory build, strong output weighs

Data from the American Petroleum Institute, released on Tuesday, indicated that U.S. grew by 4.9 million barrels in the week to April 26, a far greater build than the increase of 1.5 million barrels expected.

While gasoline and distillate stockpiles shrank, if this rise in overall inventories id confirmed by , due later in the session, it would suggest that oil supplies were not as tight as initially expected in the world’s biggest fuel consumer. 

This notion was reinforced by separate data showing U.S. domestic crude output rose to 13.15 million barrels per day in February from 12.58 million barrels in January, its biggest jump since October. The rise also saw U.S. production come back in sight of record highs. 

This spurred doubts over just how tight global crude markets would be in the coming months, given that U.S. output remains robust and the country’s oil markets remain well supplied. 

Fed fears in play, dollar strength weighs 

Markets were also on edge ahead of the conclusion of a two-day policy meeting of the Federal Reserve later in the day.

While the central bank is widely expected to , Fed Chair Jerome Powell is likely to strike a hawkish note following a series of strong inflation readings.

Expectations of higher-for-longer U.S. interest rates saw the dollar rise sharply this week, which also weighed on oil prices, with prolonged exposure to elevated interest rates likely to weigh on economic activity by the world's largest consumer.

Middle East peace talks

A potential ceasefire between Israel and Hamas could also further downplay expectations of tighter markets, as it would lower the risks of supply disruptions in the key oil-rich Middle East. 

Expectations that a ceasefire agreement between Israel and Hamas could be in sight have grown following a renewed push led by Egypt.

"The geopolitical risk premium continues to fade as tensions between Israel and Iran have eased. There are also some hopes for a potential ceasefire between Israel and Hamas," said analysts at ING, in a note.

(Ambar Warrick contributed to this article.)