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Oil prices eased in early trade on Thursday as concerns about a potential slowdown in the U.S. economy amid prospects for delayed interest rate cuts outweighed worries over the risk of expanding conflict in the Middle East.

Brent crude futures dipped 9 cents, or 0.1%, to $86.95 a barrel at 0024 GMT, and U.S. West Texas Intermediate crude futures slipped 7 cents, or 0.1%, to $82.74 a barrel. Both benchmarks lost less than 1% on Wednesday.

"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.

"On the other hand, a delayed U.S. interest rate cut has been a source of concern for the U.S. economy and the demand for crude oil, which weighs on oil market," he said.

Israeli warplanes pounded the northern Gaza strip for a second day on Wednesday in a fierce assault that has shattered weeks of comparative calm. Israel also said it was moving forward with plans for an all-out assault on Rafah in the south.

Meanwhile, U.S. business activity cooled in April to a four-month low, with S&P Global saying on Tuesday its flash Composite PMI Output Index, which tracks the manufacturing and services sectors, fell to 50.9 this month from 52.1 in March.

The U.S. Federal Reserve has been spooked by a string of stronger-than-expected inflation and employment readings, which suggest the fight to bring inflation back down to the central bank's 2% target rate has stalled or reversed.

U.S. gross domestic product and March personal consumption expenditure data later this week will be crucial for the dollar and any attempt to gauge the path of U.S. rates.

Energy Information Administration (EIA) data on Wednesday indicated U.S. crude oil inventories unexpectedly fell last week as exports jumped, while gasoline stockpiles decreased less than forecast. [EIA/S]

Crude stocks slumped by 6.4 million barrels to 453.6 million barrels in the week ended on April 19, the EIA said, compared with expectations in a Reuters poll for an 825,000-barrel rise.

"The data provided a temporary boost to oil prices, but it didn't seem to last long," Fujitomi's Tazawa said.