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Oil prices were holding steady in early trading on Thursday, following the previous day's session where oil handed back early gains to settle at similar levels to those seen at the end of trading on Tuesday.

Crude oil for August delivery traded on the New York Mercantile Exchange (NYMEX) closed at $136.05 on Wednesday, up only $0.01 on the previous day having reached an intra-day high of $138.91 per barrel. London's Intercontinental Exchange (ICE) Brent crude contract settled at $136.58 per barrel, up only $0.15 on levels recorded a day earlier.

Statistics released yesterday by the Energy Information Administration (EIA) showed that U.S oil stocks had dropped by 5.84 million barrels last week to 293.9 million barrels, a decline of 2 percent. The figure was far above the 1.9 to 2.1 million barrel forecast predicted by market analysts and prompted an initial rise in oil prices.

Gains were tempered, however, by the fact that much of the inventory decline was on the West Coast, where the distribution system is said to be isolated from the rest of the country and stock levels are not representative of overall supplies. Gasoline stockpiles also rose higher than expected, thus partly offsetting the decline in crude inventories.

Support for crude also came as the dollar fell the most in a week against the euro yesterday on speculation U.S. mortgage losses will deepen, increasing the demand for commodities as a hedge against inflation.

News that Iran's elite Revolutionary Guards had test-fired a missile it said is capable of reaching Israel also supported bullish sentiment during yesterdays trading session.

The Shahab-3 was amongst nine missiles fired off simultaneously from an undisclosed location in the Iranian desert yesterday, state television pictures showed.

NYMEX WTI crude oil was trading at $136.21 per barrel at 10:10 GMT on Thursday, up $0.15 on the previous day. London Brent crude for August delivery was pegged at $136.98 per barrel, up $0.40 on yesterday's settlement price.