By Katya Golubkova and Trixie Yap

(Reuters) -Oil prices were slightly higher on Wednesday after industry data showed a surprise drop in stocks last week, a positive sign for demand, though markets were also keeping a close eye on hostilities in the Middle East.

futures gained 5 cents, or 0.06%, to $88.47 a barrel and U.S. West Texas Intermediate crude futures climbed 8 cents, or 0.1%, to $83.44 a barrel at 0410 GMT.

U.S. crude inventories fell 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.

Traders will be watching for the official U.S. data on oil and product stockpiles due at 10:30 a.m. EDT (1430 GMT) for confirmation of the big drawdown.

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.

"This could help convince policy makers that rate cuts are required to support the economy," ANZ analysts said in a note.

U.S. interest rate cuts could bolster economic growth and, in turn, demand for oil from the world's top consumer of the fuel.

Analysts were still focused on the latest developments in conflicts in the Middle East, though the impact on oil supplies remains limited for now.

"Recent reports suggest that both Iran and Israel consider the current operations concluded against one another, with no follow-up action required for now," ING analysts said in a note.

"The US and Europe are preparing for new sanctions against Iran – although these may not have a material impact on oil supply in the immediate term," they added.

Israeli strikes intensified across Gaza on Tuesday, in some of the heaviest shelling in weeks.