Investing.com– Oil prices steadied Wednesday, largely handing back early gains but remaining near two-month highs after industry data showed U.S. inventories dropped substantially last week, boosting optimism over demand.

At 07:00 ET (11:00 GMT), rose 0.2% to $86.37 a barrel, while climbed 0.1% to $82.88 a barrel. 

Hurricane supply jitters ease, economic worries persist 

Early gains have largely evaporated Wednesday with traders growing less concerned that Hurricane Beryl will cause disruptions in offshore oil production around Mexico and the east coast.

The hurricane, which is currently a dangerous category 4 in the Caribbean, is expected to weaken into a tropical storm by the time it enters the Gulf of Mexico later in the week, according to the U.S. National Hurricane Center. 

Initial forecasts for the hurricane had pegged it as a category 5, which sparked concerns that it would disrupt supplies.

Also weighing on sentiment were surveys showed that China’s services activity expanded at the slowest pace in eight months and confidence hit a four-year low in June dragged by slower growth in new orders.

The picture was equally bleak in Europe, as overall business growth across the eurozone slowed sharply last month.

HCOB’s for the currency union, compiled by S&P Global and seen as a good gauge of overall economic health, dropped to 50.9 in June from May’s 12-month high of 52.2.

US inventories fall sharply as summer demand picks up – API 

The crude markets had seen strong gains earlier in the session as data from the showed that U.S. inventories shrank by nearly 9.2 million barrels in the week to June 28, much more than expectations for a draw of 0.15 million barrels. 

The reading, which usually heralds a similar reading from due later in the session, increased optimism over increased U.S. demand, as the travel-heavy summer season picks up. 

The American Automobile Association forecast that this week will have a record amount of road travel, on account of the Independence Day holiday on Thursday. 

Hopes of a substantial pick up in U.S. fuel demand have been among the key drivers of oil’s recent rally, even as the world’s biggest fuel consumer grapples with cooling economic growth amid high interest rates and sticky inflation.

Fed minutes and labor data in focus 

The Federal Reserve is set to release later Wednesday the  from its monetary policy meeting in June, when the central bank left interest rates unchanged at a more than two-decade high range and signaled that it expects to cut borrowing costs just once this year.

There is also more labor market data to study, including private payrolls from the ADP, ahead of Friday’s key nonfarm payrolls release.

(Ambar Warrick contributed to this article.)