By Robert Harvey and Deep Kaushik Vakil

LONDON (Reuters) -Brent crude oil prices steadied around $88 a barrel on Wednesday after rallying in the previous session on a surprise fall in stocks and a drop in business activity in the world’s largest oil consumer.

futures were down 12 cents, or 0.14%, to $88.30 a barrel by 1158 GMT, while U.S. West Texas Intermediate crude futures had lost 23 cents, or 0.28%, to $83.13.

That reversed some of Brent’s 1.6% gain from the previous session, when the market was also buoyed by a weaker U.S. dollar and as investors dialled down concerns over conflict in the Middle East. [USD/]

Perceived de-escalation between Iran and Israel could remove another $5-10 a barrel of “the still elevated geopolitical risk premium” in coming months, Goldman Sachs analysts said in a note, putting a $90 per barrel ceiling on Brent.

U.S. business activity cooled in April to a four-month low, with S&P Global saying on Tuesday that 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 world’s biggest economy currently falls into the ‘bad news is good news category'”, said Tamas Varga at oil broker PVM. “The odds of a Fed rate cut have grown once again.”

U.S. interest rate cuts could bolster economic growth and, in turn, stimulate demand for oil.

“Attention shifted to macro issues, to the stock markets and to the dollar and none of them disappointed,” Varga added.

In Germany, business morale improved more than expected in April according to a survey on Wednesday, boosting hopes that the worst may be over for Europe’s biggest economy.

U.S. crude inventories fell by 3.237 million barrels in the week ended April 19, according to market sources citing American Petroleum Institute figures. In contrast, six analysts polled by Reuters had expected a rise of 800,000 barrels. [EIA/S]

Traders will be watching the official data release on oil and product stockpiles at 1430 GMT.

Meanwhile, the Israel-Hamas conflict continues to rage with some of the heaviest shelling in weeks on Tuesday, while sources on Wednesday said Israel is preparing to evacuate Rafah ahead of a promised assault on the city.