SINGAPORE/TOKYO Oil prices steadied on Thursday after settling lower in the previous day, as signs of retreating fuel demand in the US, the world's biggest oil user, contended with widening conflict risks in the key Middle East producing region.

Brent crude futures inched up 18 cents, or 0.2%, to US$88.20 a barrel at 0630 GMT, while US West Texas Intermediate crude futures gained 13 cents, or 0.2%, to US$82.94 a barrel.

Data from the US Energy Information Administration (EIA) on Wednesday showed that gasoline stockpiles fell less than forecast, while distillate stockpiles rose against expectations of a decline, reflecting signs of slowing demand. 

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 that 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 US$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 the 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.

Meanwhile, 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 risk of a wider war that could potentially disrupt 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 that crude stocks slumped by 6.4 million barrels to 453.6 million barrels, compared with expectations in a Reuters poll for an 825,000-barrel rise.