Oil rallies after record 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

* Saudi oil min: US not a threat as Mexico, Venezuela output drops

* Brent, U.S. crude futures hit highest since Dec (Shanghai: 600875.SS - news) 2014

* Weaker dollar supports greenback-denominated commodities

* Options activity shows rising downside protection (Updates prices, adds comments from Saudi oil minister in Davos)

By David Gaffen

NEW YORK, Jan 24 (Reuters) - U.S. 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.

U.S. crude inventories fell by 1.1 million barrels last week, 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. At 411.6 million barrels, stocks are at their lowest since February 2015.

The steady draw has triggered record buying by speculators, pushing oil benchmarks to three-year highs.

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 greenback-denominated commodities less expensive for investors using other currencies.

U.S. West Texas Intermediate (WTI) futures were up 36 cents at $64.83, after hitting their highest since December 2014, as of 12:44 p.m. EST (1744 GMT). Brent futures slipped five cents to $69.92 a barrel, after also hitting their 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. crude production rose to 9.9 million barrels per day last week, nearing the all-time record of 10.04 million bpd set in 1970, the EIA data showed.

Speaking at the World Economic Forum in Davos, Switzerland, Khalid al-Falih, Saudi Arabia's energy minister, said he is not concerned about the threat of U.S. production, citing declining output from Venezuela and Mexico.

U.S. refining capacity use declined by 2.1 percentage points as maintenance season began, though gasoline and diesel demand still exceeded year-ago levels, the EIA said.

"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 (Xetra: CBK100 - news) 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.

(Additional reporting by Amanda Cooper and Henning Gloystein; Editing by Marguerita Choy and David Goodman)