Oil steady as market weighs US demand concerns, Middle East conflict risks

The falling fuel demand is occurring amid signs of cooling US business activity in April and as stronger-than-expected inflation and employment data means the U.S. Federal Reserve is more likely to delay expected interest rate cuts, weighing on economic sentiment.

Oil prices were little changed on Thursday as falling fuel demand in the US, the world's biggest oil user, amid signs of a slowing economy contended with concerns for a widening conflict in the key Middle East producing region.

Brent crude futures edged up 9 cents to $88.11 a barrel at 0420 GMT, after falling 0.5% in the previous session.

US West Texas Intermediate crude futures for June gained 7 cents to $82.88 a barrel, following a 0.6% drop on Wednesday.

Data from the US Energy Information Administration (EIA) on Wednesday showed gasoline demand in the week to April 19 dropped 2.8% from a week earlier and is down 11% from a year ago. Distillate fuel demand also declined from a week ago and is down 4.7% from a year ago.

The falling fuel demand is occurring amid signs of cooling U.S. business activity in April and as stronger-than-expected inflation and employment data means the US Federal Reserve is more likely to delay expected interest rate cuts, weighing on economic sentiment.

"The current weakness in benchmark prices, after testing above $90 (a barrel) levels, is due to market sentiment refocusing on global economic headwinds over geopolitical tensions," said Emril Jamil, senior oil analyst at LSEG Oil Research.

Geopolitics aside, prices this quarter will be driven by factors including major producer supply cuts, economic data out of China and Eurozone, on top of incremental demand expectations as the Northern Hemisphere heads into summer amid expected tighter supply, said Jamil.

A better indication of the Fed's rate intentions will be seen after US gross domestic product and March personal consumption expenditure data is released on Thursday and Friday.

Fighting in the Gaza Strip between Israel and Hamas is expected to expand as Israel may start an assault on Rafah, in the enclave's south, which may increase the chances of a wider war that could potentially disrupt Middle East oil supplies. However, there have been no other signs of direct conflict between Israel and Hamas-backer Iran, a major oil producer, since last week.

"Tensions between Iran and Israel have eased, but Israeli attacks on Gaza are expected to worsen, and the risk of conflicts spreading to neighbouring countries is underpinning oil prices," said Toshitaka Tazawa, an analyst at Fujitomi Securities Co Ltd.

Other EIA data on Wednesday showed US oil inventories unexpectedly fell last week as exports jumped, while gasoline stockpiles decreased less than forecast.

Crude stocks slumped by 6.4 million barrels to 453.6 million barrels, the EIA said, compared with expectations in a Reuters poll for an 825,000-barrel rise.