Oil steady after sharp losses on slowing US demand

US crude futures eased 7 cents to $134.53 a barrel at 0627 GMT, after sliding $4.14 on Wednesday.

The losses, together with Tuesday's drop of $6.44, bring oil close to $13 below last week's all-time peak.

London Brent crude for September shed 23 cents to $135.57 a barrel. The August contract expired down $2.56 on Wednesday.

The price slide, which marked the biggest two-day loss in percentage terms since January 2007, propped up stocks on Wall Street, helping it regain some of the ground lost in recent days on fears over the health of the US banking sector.

‘Oil prices are now at a level where you are beginning to see demand adjustments,’ said David Moore, an analyst at Commonwealth Bank of Australia.

Investors looking to hedge against inflation and the weak dollar have dumped their money into oil and other commodities, contributing to a 50 percent oil price rally this year that reached a peak above $147 a barrel this month.

Dealers said Wednesday's losses were triggered by a 3 million-barrel increase in US crude stocks according to data from the Energy Information Administration, against forecasts for a fall, alongside a rise in gasoline and distillates.

‘Besides the increase in crude, gasoline, and distillate stocks, it's interesting to note that demand in the United States remains relatively weak as well,’ Moore said.

The widely watched government report also showed US oil products demand running 2.0 percent below year-ago levels, another sign that soaring prices are cutting into consumer demand for fuel, and as the US economy was going through a rough ride.

Adding to pressure on oil prices, a senior US official said on Tuesday the United States planned to send an envoy for talks this weekend between Iran and major powers over Teheran's nuclear programme.

Washington had said it would not be involved in any pre-negotiations with Iran unless it gave up nuclear enrichment. The standoff between the Islamic Republic and the West has helped boost oil prices .

Saudi Arabia, the world's top oil exporter, wants to see lower oil prices, Saudi King Abdullah said in an interview with an Italian newspaper.

Oil's six-year rally has also been driven partly by ballooning demand from developing economies such as India and China.

Investment banks Goldman Sachs and JP Morgan trimmed their 2008 growth forecasts for China and ruled out interest rate rises this year after the government said growth slowed to 10.1 percent in the second quarter.

In South America, an oil worker strike in Brazil this week was not significantly affecting oil production levels, state oil company Petrobras said on Tuesday.